competitive markets- pros and cons

• What is allocated efficiency in a competitive market?

  Price equals marginal cost
• In competitive markets, consumers pay what it costs to produce, resulting in lower prices.
• Consumer surplus is higher in competitive markets due to lower prices
• How do competitive markets affect resource allocation?

  Follow consumer demand
• Arrange the following outcomes in competitive markets in order of their occurrence:

  1️⃣ Lower prices

  2️⃣ Higher quantities

  3️⃣ Increased consumer surplus
• Competitive markets ensure that firms minimize their average costs to remain productively efficient.
• Ex efficiency in competitive markets involves minimizing waste
• How does static efficiency benefit consumers in competitive markets?

  Lower prices and higher quantities
• One major issue with competitive markets is the lack of dynamic efficiency
• Competitive markets lead to job creation due to higher quantities produced.
• Why might competitive markets lack dynamic efficiency?

  Normal profit limits reinvestment
• Competitive markets may not achieve economies of scale like monopolies can.
• Match the market structure with its efficiency characteristic:

  Monopoly ↔️ Productively inefficient

  Competitive Firm ↔️ Productively efficient

  Economies of Scale ↔️ Lower costs
• What does the diagram illustrating economies of scale in monopolies show?

  Lower costs than competitive firms
• Even though monopolies are productively inefficient, they can sometimes charge lower prices due to economies of scale.
• Cost-cutting in competitive markets should not compromise safety or environmental standards
• What is creative destruction in competitive markets?

  New firms replace old ones
• Workers displaced by creative destruction may find new jobs in innovative
• How might competitive markets still achieve dynamic efficiency despite normal profit levels?

  Reinvestment in competition
• Small-scale reinvestment can contribute to dynamic efficiency in competitive markets.
• Natural monopolies are better regulated than subjected to competition
• Static efficiency is always preferred over dynamic efficiency in every market.

  False
• Why should regulators ensure cost-cutting in competitive markets does not compromise safety?

  To protect societal interests
• Match the type of good with the preferred market efficiency:

  Necessity goods ↔️ Static efficiency

  Luxury goods ↔️ Dynamic efficiency
• What type of market might consumers be willing to pay higher prices for innovation and differentiation?

  Electronics
• Consumers in necessity markets prefer lower prices and higher quantities, indicating a preference for static efficiency.