Perfectly competitive markets (for private goods and services at equilibrium) are allocatively efficient
Private goods and services are both excludable (owners can prevent those who have not paid for it from using it or gaining benefit from it) and rivalrous (consumption by one reduces the amount left for others to consume it).
Market equilibrium occurs at the market price where quantity demanded equals quantity supplied.
Competitive markets are ones in which there are many buyers and many sellers so that each has a negligible impact on the market price.
In perfectly competitive markets, (those in which there are so many buyers and sellers that each has no influence over the market price [so are price takers] and the goods offered for sale are exactly the same), market equilibrium is allocatively efficient (the sum of consumer and producers surpluses are maximised).
Key concept indicators
- Illustrates on supply and demand graphs for competitive domestic and internally traded goods and service markets:
- market equilibrium
- changes in market equilibrium resulting from changes in factors affecting the supply and/or demand in that market (for example, falling demand for a NZ export due to recessions in overseas markets or rising costs in a local market resulting from a resource shortage) and changes imposed on markets by government (for example, sales taxes, tariffs, subsidies, and price controls)
- the impact of changes in markets, on efficiency in those markets, by showing the effects on producer and consumer surplus as well as deadweight losses, which result when government intervenes in competitive markets.
Note: Some of these illustrations will involve showing complex concepts. For example, the changes in consumer and/or producer surplus that result from government reducing protection from an imported goods market.
- Provides detailed explanations
1 of:
- market forces that lead market equilibrium and/or changes in market equilibrium
- impact of changes in markets on efficiency in the market.
Note: Detailed explanations relating to the efficiency of market equilibrium should be supported by evidence from the relevant supply and demand graph.
- Compares and contrasts the impact of a change in a market on efficiency by:
- providing detailed explanations of the differing impacts on the different participants in the market. For example, explaining in detail that impact of a sales tax on the good with elastic demand will impact more heavily on producers than consumers and will not be a good earner of government revenue (but will significantly reduce quantity demand which may be the government's objective)
- integrating evidence, from supply and demand graph(s), related to the efficiency of market equilibrium into the detailed explanations that compare and contrast the different impacts on participants in the market. For example, when explaining in detail why free trade of an export good is allocatively more efficient than not trading, integrating would require reference to the triangle that shows the amount by which the increase producer surplus exceeds the decrease in consumer surplus, as this evidence from the graph shows the increase in allocative efficiency.
1 Detailed explanations to economic questions typically have three parts. For example, What is the answer, Why is this the answer, How do you know?
Example
What happens in a market if the current market price exceeds the equilibrium price?
Answer
The market price (Pcurrent) will decrease to the equilibrium price (Pequilm) because the current price creates an excess supply in this market (shown by the gap between Qs and Qd at Pcurrent). Producers respond by lowering the price to encourage consumers to increase the quantity they demand (from Qd to Qequilm) and/or to undercut other producers, forcing them from the market by decreasing the quantity supplied (from Qs to Qequilm), and the surplus disappears.
Note: Hypothetical evidence has been added to show how an economic model could be used to support a detailed explanation.
Last updated May 10, 2013
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