PCM & Efficiency

Which statement best describes how allocative efficiency is achieved in a perfectly competitive market?

• Firms innovate to develop better products over time

• Goods and services are produced according to consumer demand at the market price

• Firms produce at the lowest average cost to maximise output

• Long-term resource planning is prioritised over current consumer needs

Answer explanation

Allocative efficiency in a perfectly competitive market occurs when goods and services are produced according to consumer demand at the market price, ensuring resources are allocated where they are most valued.

What does strong competition lead to in a market?

• Higher prices

• Innovation and better quality products

• Less choice for consumers

• Decreased customer service

Answer explanation

Strong competition in a market drives companies to innovate and improve product quality to attract consumers, leading to better options and advancements rather than higher prices or decreased service.

What is a key benefit of "intertemporal efficiency" in competitive markets

• Lower costs for monopolies

• Encourages firms to anticipate future trends

• Promotes product differentiation

• Reduces competition

Answer explanation

A key benefit of intertemporal efficiency is that it encourages firms to anticipate future trends, allowing them to make better investment and production decisions that align with expected market changes.

Why are consumers better off in a perfectly competitive market?

• Firms are price takers, ensuring lower prices

• Firms control prices to maximise profits

• Firms restrict production to increase demand

• Firms focus on maximising economies of scale

Answer explanation

In a perfectly competitive market, firms are price takers, meaning they accept the market price. This leads to lower prices for consumers, as firms cannot charge more than the market price without losing customers.

How does perfect competition enhance material living standards?

• By allowing firms to set high prices

• By reducing consumer purchasing power

• By improving access to goods and services at lower prices

• By eliminating consumer choice

Answer explanation

Perfect competition enhances material living standards by improving access to goods and services at lower prices. This allows consumers to purchase more with their income, increasing overall welfare.

What is a characteristic of a market with economies of scale?

• Higher production costs

• Increased efficiency

• More small businesses

• Less government oversight

Answer explanation

A market with economies of scale typically experiences increased efficiency as larger production volumes lead to lower per-unit costs, optimizing resource use and enhancing productivity.

What type of efficiency ensures resources are used in ways that minimise the opportunity cost of decisions?

• Dynamic efficiency

• Technical efficiency

• Allocative efficiency

• Operational efficiency

Answer explanation

Allocative efficiency ensures that resources are allocated in a way that maximizes the benefit to society, minimizing the opportunity cost of decisions by producing the right goods in the right quantities.

Perfect competition leads to productive efficiency because:

• Perfect competition allows for monopolistic practices.

• Firms aim to maximise resource use and minimise costs

• Firms produce at varying levels of efficiency.

• Firms can set prices above average cost.

Answer explanation

Firms in perfect competition strive to maximize resource use and minimize costs, leading to productive efficiency. This ensures that resources are allocated optimally, unlike monopolistic practices or varying efficiency levels.

Allocative efficiency is achieved in perfect competition because:

• Firms use resources in ways which directly meet consumer demands

• All firms produce at a loss in perfect competition.

• Firms can influence prices due to brand loyalty.

• Price is set by government regulation in perfect competition.

Answer explanation

Allocative efficiency in perfect competition occurs because firms allocate resources effectively to meet consumer demands, ensuring that the quantity produced matches what consumers want at the prevailing price.

Dynamic efficiency is achieved in perfect competition because:

• Firms have complete knowledge of prices and market conditions

• Firms limit output to maintain higher prices and profit margin

• Firms minimise production costs to maximise short-term profits.

• Firms innovate and adapt to changing consumer preferences and market trends.

Answer explanation

Dynamic efficiency in perfect competition is achieved as firms innovate and adapt to changing consumer preferences and market trends, ensuring they remain competitive and responsive to the market.