Perfectly competitive firms produce at an allocatively efficient level.
Monopolies can increase price above the marginal cost of production and are allocatively inefficient. Allocative efficiency would occur at the point where the MC intersects the demand curve so Price = MC.
In monopolistic competition, when the Marginal Cost is less than the price per unit, the firm is considered Allocatively Inefficient. In the long run, Monopolistically Competitive firms are inefficient because they underuse their full capacity.
Key Formula: Price=Marginal Cost
Do not confuse this with MR=MC which is the equation to find the profit maximizing point.
Monopolies can increase price above the marginal cost of production and are allocatively inefficient. Allocative efficiency would occur at the point where the MC intersects the demand curve so Price = MC.
In monopolistic competition, when the Marginal Cost is less than the price per unit, the firm is considered Allocatively Inefficient. In the long run, Monopolistically Competitive firms are inefficient because they underuse their full capacity.
Key Formula: Price=Marginal Cost
Do not confuse this with MR=MC which is the equation to find the profit maximizing point.