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Productive and Allocative Efficiency in Perfect Competitive Firm

   

Added on  2020-04-07

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Running head: ECONOMIC PRINCIPLES1Economic PrinciplesStudent’s nameProfessorCourseDate

ECONOMIC PRINCIPLES2Question 2Productive and Allocative Efficiency in Perfect Competitive FirmProductive EfficiencyProductive efficiency takes place if a firm produces at the lowest point of the average cost curve. When a business exhibit productive efficiency, it shows that there is no excess capacity and that the available resources are well deployed for the advantage of the society[ CITATION Bra16 \l 1033 ]. In the long run, a company under perfect competitive market is in a position to achieve productive efficiency because the generation of goods and services occurs at the lowest point of the average cost curve. Figure 1: Productive efficiency under perfectly competitive firmprice and costFigure one above exhibits the long run situation of an enterprise functioning under perfect competition market. Pe is the profit maximizing price whereas as Qe is the profit maximizing output. It is clear that a perfectly competitive company is productive efficient MCAC0P=MR=ARPeHQuantity Qe

ECONOMIC PRINCIPLES3because the generation of products happens at the lowest point of the average cost curve, that is, point H, where the marginal cost matches the average cost.Allocative EfficiencyWhen allocative efficiency takes place, it is a signal that the point selected on the Production Possibility Curve is socially desirable. Further, this type of efficiency demonstrates that the resources are apportioned to the creation of commodities that results in the best outcome for the community. Under perfect competitive market, allocative efficiency occurs because production happens at a point where the price equals the marginal cost[ CITATION Sat13 \l 1033 ]. Figure 2: Allocative efficiency under perfectly competitive firmprice and costP1 denotes the profit maximizing price while Q1 is profit maximizing production. A perfectly competitive company operates at point F where the price matches the marginal cost, that is, P=MC. This situation illustrates that allocative efficiency is attained and that resources are allotted in the best interest of the community[ CITATION Man14 \l 1033 ]. ACP=MR=ARP1Q10Quantity MCF

ECONOMIC PRINCIPLES4Question 5Inflation in PakistanInflation denotes a sustained rise in the general prices in an economy[ CITATION Hub16 \l 1033 ]. The type of inflation that Pakistan is encountering is referred to as cost-push inflation. Cost-push inflation relates to a loss of the purchasing power of currency resulting from an increase in the cost of production. Factors that disrupt supply like natural disasters and a hike in the cost of production lead to a weak supply and hence cost-push inflation[ CITATION Goo14 \l 1033 ].Figure 3: Cost-push inflationPrice levelReal GDP (Y)SRAS1 is the initial aggregate supply curve where the real Gross Domestic Product is denoted by Y2 while the price is P1. Now when the supply is disrupted due to increase in the ADSRAS 2SRAS 1Y1Y2P2P1

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