Explain why perfectly competitive markets achieve allocative efficiency.
What will be an ideal response?
In a perfectly competitive market, market supply equals market demand. Also, market price equals marginal cost. Therefore, if market supply is less than market demand, then buyers value the last unit of output more than the marginal cost. In such a case, producers need to increase production to meet the market demand. In addition, if market supply is more than market demand, then the cost to producers for producing a good is greater than marginal benefit to consumers. As a result, production should decrease so that it meets market demand. The perfectly competitive market, therefore, constantly moves toward an equilibrium between market supply and demand. When this happens, producers are producing what buyers want. This condition is called allocative efficiency because producers are allocating to reflect consumer preferences.
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Inefficient allocation of resources occurs when
a. no one can be made better off without having someone else give up something. b. it is possible to make some people better off without making others worse off. c. society is operating at a point high on the production possibilities frontier. d. society is operating at a point low on the production possibilities frontier.
Poverty thresholds are adjusted ______ for inflation.
a. weekly b. monthly c. annually d. each decade