• Apply concepts of productive efficiency and allocative efficiency to perfectly competitive markets

• Compare the model of perfect competition to real-world markets

When profit-maximizing firms in perfectly competitive markets combine with utility-maximizing consumers,

something remarkable happens: the resulting quantities of outputs of goods and services demonstrate both

productive and allocative efficiency (terms that we first introduced in (Choice in a World of Scarcity) .

Productive efficiency means producing without waste, so that the choice is on the production possibility

frontier. In the long run in a perfectly competitive market, because of the process of entry and exit, the price in

the market is equal to the minimum of the long-run average cost curve. In other words, firms produce and sell

goods at the lowest possible average cost.

Allocative efficiency means that among the points on the production possibility frontier, the chosen point is
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