Allocative Efficiency (Chain of Analysis)

This short video explains how to build a chain of reasoning to help explain how a firm operating in perfect competition will arrive at an equilibrium price and output that achieves allocative efficiency.

Allocative efficiency is a state when the market equilibrium is at a price that represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of supply. Happens in a perfectly competitive market (MPB=MPC).