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Market Efficiency Issues - Assignment Example

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The assignment "Market Efficiency Issues" focuses on the factors of market structure efficiency. Efficiency in market relates to a situation in which it’s not possible to increase overall welfare in the society; it may be possible to increase someone’s welfare but that would only come at a cost of other’s welfare…
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Market Efficiency Issues
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Download file to see previous pages The efficiency could be of two types: productive and allocative, where the former refers to how efficient is the production, i.e. least cost, and the latter one reflects the goods and services are produced according to their value for the customers.
The 100% efficient market is an ideal concept just like a perfectly competitive market with no existence in reality. But some markets come quite close to being efficient. The concept of efficiency determination by market structure was offered by Adam Smith. He was of the view that if perfectly competitive markets in their pursuit of self-interest ultimately result in an efficient market. As the market moves away from perfect competition to imperfect competition, the efficiency goes down.
We can understand the reason for the difference in the efficiency with the help of the graphs which depict profit maximizing conditions for both perfectly competitive and imperfectly competitive markets.
Thus, we see that in perfect competition at profit maximizing point MC = P = D, which means MC = MU, meaning the marginal benefit accruing to the society is exactly equal to the marginal loss to the society (MC). Thus at this point the efficiency is highest and moving from this point will decrease the efficiency but a firm in a competitive market will not be motivated to do so, i.e. move away from MC = MR.
(Personal computer market) - The profit-maximizing point for a monopolist will also be at MR = MC. In the graph, MR = MC is where output is 10 at price 50. Since at this point price is higher than MC, i.e. d > MC. In this case, it’s possible to increase the welfare in society by producing further as long as MC is smaller than the price. Which is actually a case where Q =10. So, to increase efficiency, a monopolist should produce more but that will reduce the profits, thus monopolist will restrict at this point leaving market inefficient. ...Download file to see next pages Read More
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