why in allocative efficiency.p=mc
In economics, allocative efficiency refers to a situation where resources are allocated in such a way that the maximum possible value is achieved. In other words, it means that resources are allocated in a way that maximizes social welfare or overall economic efficiency.
The condition for allocative efficiency in a perfectly competitive market is that price (P) should equal marginal cost (MC), which is represented by the equation P = MC.
This condition is derived from the concept of efficiency in production and consumption. When the price (P) is equal to the marginal cost (MC), it means that the additional cost of producing one more unit of a good (MC) is equal to the additional benefit or value that consumers place on that unit (represented by the price, P). This equilibrium condition ensures that resources are being efficiently allocated because there is no wasteful overproduction or underproduction.
To understand why P = MC represents allocative efficiency, you need to understand the economic concept of marginal analysis. Marginal analysis involves examining the costs and benefits of producing or consuming one additional unit of a good.
In a competitive market, firms aim to maximize profit. They will continue to produce as long as the marginal cost of producing an additional unit is less than or equal to the price they can sell that unit for. This ensures that firms are allocating resources efficiently and not wasting resources on producing goods that have a higher marginal cost than the price consumers are willing to pay.
Similarly, from the consumer's perspective, they will continue to purchase goods as long as the marginal benefit they receive from consuming an additional unit is greater than or equal to the price they have to pay. This ensures that consumers are efficiently allocating their income by purchasing goods that provide the maximum benefit relative to their cost.
When price (P) is equal to marginal cost (MC), it means that the additional cost of producing one more unit is equal to the value consumers place on that unit. This equilibrium condition ensures that resources are efficiently allocated, and society achieves the maximum possible value from the production and consumption of goods.
Thus, the condition P = MC represents allocative efficiency in a perfectly competitive market. It ensures that resources are allocated in a way that maximizes social welfare and economic efficiency.