The proposition that, given certain assumptions, perfect competition will result in an efficient allocation of resources
Under perfect competition, resources end up used in the best possible way. Prices are driven down to the lowest sustainable level, and firms produce exactly what consumers value most.
Formula
P = MC (allocative efficiency); P = min AC (productive efficiency)
Real World
In agricultural commodity markets like wheat farming, intense competition drives prices down to the minimum average cost, meaning no individual farmer can sustainably charge above the cost of production — closely mirroring the perfect competition ideal.
Exam Focus
State both efficiency conditions explicitly; examiners expect P=MC for allocative and P=min AC for productive efficiency.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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