Gaith Kalai

Pg. 126 3+4

3. How do you think the achievement of productive and allocative efficiency is related to
the definition of Economics that we discussed in Chapter 1?

Economics- the social scientific study of scarcity and how it affects the inner-workings of
businesses on a small and large scale.
Allocate efficiency- is achieved when MB =MC; since MB=P, this correlation is said to be
MC=P.
Productive efficiency- is achieved when P= minimum ATC.

Both productive and allocative efficiency deal with scarcity and its definition; efficiency in
general revolves around utilizing as little labor as possible to produce the most output which
generates revenue and so on.
Additionally, the best possible use of scarce resources is when the best possible combination of
goods and services are used in conjunction to minimize the waste of resources.

Productive efficiency relates to this modern definition of economics because this means that a
company produces at the lowest possible price which also in turn uses scarce resources in the
best possible way.

4. Evaluate the perfectly competitive market model by referring to the insights it offers and
its limitations.
The use of the “given word” of perfect competition as the foundation of price theory for product
markets is often criticized as representing all agents as ceterus paribis, thus removing the active
attempts to increase one's “caste” or profits several marketing techniques. Other limitations
include:

1. Unrealistic Assumption: All the assumption on which a perfectly competitive market is based
on are unrealistic ones. Even if we take a village or a local market, still many assumptions
remain impractical. Therefore, perfect competition is considered as a theoretical abstraction,
impossible to apply to practical situations.

2. Principles are not applicable: Perfect competition model derives many principles for the
operation of a firm. For example, equilibrium production is decided at a point where MC = MR.
In reality most of the business people are unaware of this rule, and if aware, they either do not or
cannot apply it.

3. Time Period: A firm operates in the short –run and if it survives settle down in the long – run.
Alfred Marshall, himself admitted the absence of a clear cut distinction between the two periods.
At any rate they cannot be measured by calendar years. It is highly difficult for a firm to decide
that its time adjustment is over and it is time for it (long run) to settle down.
Advertisement