Economists judge a market by two kinds of efficiency.
Two kinds of efficiency
Allocative efficiency
Making what society wants most: the last unit is worth what it costs.
Productive efficiency
Making it at the lowest possible cost per unit.
Who reaches them
| Market structure | Allocative (P = MC)? | Productive (lowest AC)? |
|---|---|---|
| Perfect competition, long run | Yes | Yes |
| Monopolistic competition | No | No |
| Oligopoly | No | Usually not |
| Monopoly | No | Usually not |
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In perfect competition, firms take the price as given.
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Remember it as: Flat demand: P = MR, so MR = MC means P = MC.
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With any market power, demand slopes down and the price ends up above MC.
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The points to remember
- P > MC: buyers want more than is made, so allocative efficiency is lost.
- The same is true of monopoly and oligopoly: they all face a downward-sloping AR.
Quick reminder
- Axes: Costs, revenue up the side, Q along the bottom
- Curves: D = AR = MR, MC and AC for perfect competition; D = AR, MR, MC and AC for monopolistic competition
- Marks: P1 and Q1 where MR = MC: P1 = MC in perfect competition, P1 above MC in monopolistic competition
- Dots with dashed lines to the axes
- No numbers, no title
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With market power, demand slopes down, so the price ends up above MC.
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Paper 1 asked this in May 2026, as part (a) for 10 marks.
Explain how allocative efficiency occurs in perfect competition but does not occur in monopolistic competition.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |