At the conclusion of the topic of perfect competition, the concept of efficiency was introduced. Recall that there are three definitions of efficiency:
1. Productive or technical efficiency
2. Allocative efficiency
3. Dynamic efficiency
Recall also, that the perfectly competitive model illustrates both productive and allocative efficiency --- something that is very significant for the firm and also society because it means that 1) production is occurring at its lowest possible per unit cost, and 2) the additional cost of production exactly matches the additional value placed on the goods and services consumed. In other words, society gains the most consumer and producer surplus than in any other type of market structure resulting in a model that has an appropriate name --- perfect competition!
When considering the other three market structures, we find that the conditions for productive and allocative efficiency do NOT hold, both in the short run and in the long run.
However, there is one more definition of efficiency to consider --- dynamic efficiency.
More to follow.
