Ideal concepts, when implemented into the real world, very often fail to survive. The perfectly competitive market structure is not an exception. The model is based on such strict assumptions that its adaptation into everyday life situations, in most cases, is simply impossible; however it is often described as the ideal. In the long-run, when all the factors of production can vary, given that the maximalisation of earnings is a natural goal behind every firm’s activities, only under the perfectly competitive market’s conditions, is a firm able to reach optimum revenue and, at the same time, be totally efficient. To fully understand this phenomenon it’s necessary to first define productive and allocative efficiency in order to clearly recognize the conditions under which both of them can be achieved. Next, we should focus on how perfect competition differs from monopolistic competition, oligopoly and monopoly. This will allow us to see to what extent a firm’s resources allocation is simply determined by the market structure in which it performs. Such overview will clearly show why in the long-run, in terms of resource allocation, perfect competition is often described as the ideal market structure, and how certain market structures due to their characteristics can prevent the firms from achieving optimum efficiency.
So what makes one firm more efficient than the other? According to Griffiths and Wall, two types of efficiency need to be taken into consideration. First of all, ‘To achieve productive efficiency(or cost efficiency) a firm must use its resources in such a way as to produce at the lowest possible cost per unit of output. Therefore, productive efficiency is achieved at the lowest point on a ...