a situation where it is impossible to reallocate the resources to make at least one person better off without making someone else worse off. Allocative efficiency: a situation where it is impossible to reallocate the resources to make at least one person better off without making someone else worse off. In such a case the welfare of society cannot be improved by reallocating the resources.

Society’s welfare maximised (allocatively efficient) when… P (OC of consuming extra unit) = MC (OC of producing extra unit) Are perfectly competitive firms allocatively efficient? P P = MR MC Profit maximisation at MR = MC PMC Therefore they produce at P = MR = MC

Productive efficiency occurs when all the firms in the industry produce where their average or unit costs are at a minimum. Productive efficiency: occurs when all the firms in the industry produce where their average or unit costs are at a minimum. When this occurs – no waste of scarce resources. Perfectly competitive firms in equilibrium in the long run where average cost is at a minimum – thus productively efficient.

Short run positionLong run position