Allocative efficiency is when a firm (or industry) produces the exact amount of their product that is wanted by society. In the long run of a perfectly competitive market, a market model in which there are large numbers of sellers and buyers, all the firms produce the exact same thing, and there is free entry and exit from the industry, allocative efficiency is found by finding the quantity where price is equal to marginal cost. What this means is that each good that is being produced, since the firm is allocatively efficient, has a value that is equal to the value of the alternative good that was sacrificed by its production. In the long run time period, a perfectly competitive firm will always produce at the point where price is equal to marginal cost.Link Three

The quantity (Q) that will be produced is where marginal cost (MC) is equal to price (P)

An example of this is a potato farmer. The price that he charges per potato is three dollars and the marginal cost for each potato is two dollars. Since the price is greater than the marginal cost, the farmer is underallocating his resouces. If his price were less than the marginal cost, he would be overallocating his resources. To society, this farmer is not producing enough potatoes.

Here is a sample question:
If the price of a product is 5 and marginal cost is 5, then is it allocatively efficient?
To see the answer, highlight this black box. Yes, since marginal cost is equal to price. Link One Link Two Link Three

An example of this is a potato farmer. The price that he charges per potato is three dollars and the marginal cost for each potato is two dollars. Since the price is greater than the marginal cost, the farmer is underallocating his resouces. If his price were less than the marginal cost, he would be overallocating his resources. To society, this farmer is not producing enough potatoes.

Here is a sample question:

If the price of a product is 5 and marginal cost is 5, then is it allocatively efficient?

To see the answer, highlight this black box. Yes, since marginal cost is equal to price.

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