5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Efficiency Analysis

We refer to efficiency in a couple of different sections of this book, and now that we have

compared perfect competition to monopoly, it is time for another discussion. Allocative effi-

ciency is achieved when the market produces a level of output where the marginal cost (MC)

to society exactly equals the marginal benefit (P) received by society. Total welfare to society is

maximized at this outcome, so any movement away from this level of output results in dead-

weight loss. Productive efficiency is achieved if society has produced a level of output with the

lowest possible cost. In perfect competition, the long-run market outcome achieves both of

these criteria for efficiency. Figure 9.13 illustrates the competitive and monopoly outcomes.

130 › Step 4. Review the Knowledge You Need to Score High

Demand

Quantity

$

Marginal Revenue

Marginal Cost

Qm

Pm

AT C

Average Total

Cost

Profit > 0

Figure 9.12

• Find Qmwhere MR =MC. Once you have found Qm, never leave it.


• Find Pmvertically from the demand curve above MR =MC.


• Find ATC vertically at Qm. If you move downward, P >0. If you move upward, P <0.


• Move horizontally from ATC to the yaxis to complete the rectangle and clearly label
  it as positive or negative.

TIP

KEY IDEA

Demand

Quantity

$

Marginal Revenue

Marginal Cost

Qm

Pm

AT C

Average Total

Cost

Profit > 0

Qc

Pc

DWL

Figure 9.13

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