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Applied SENIOR
HIGH
Economics SCHOOL

Self-Learning
Module

Impact of Business on the Community:

Efficiency in Perfectly Competitive Markets
13
662
Quarter 4
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Applied Economics
Quarter 4 – Self-Learning Module 13: Impact of Business on the Community:
Efficiency in Perfectly Competitive Markets
First Edition, 2020

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Published by the Department of Education - Schools Division of Pasig City

Development Team of the Self-Learning Module

Writer: Emmanuel B. Penetrante
Editor: Edna D. Camarao, PhD
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Technical: Emmanuel B. Penetrante
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Layout Artist: Clifchard D. Valente
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Applied SENIOR
HIGH

Economics
SCHOOL

Self-Learning
Module

13
Quarter 4

Impact of Business on the Community:

Efficiency in Perfectly Competitive Markets
www.shsph.blogspot.com
Introductory Message

For the facilitator:

Welcome to the Senior High School – Applied Economics Self Learning Module
on Impact of Business on the Community: Efficiency in Perfectly Competitive
Markets!

This Self-Learning Module was collaboratively designed, developed and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
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For the learner:

Welcome to the Applied Economics Self Learning Module on Impact of

Business on the Community: Efficiency in Perfectly Competitive Markets!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
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EXPECTATIONS

After going through this module, you are expected to:

1. discuss the efficiency in perfectly competitive markets;
2. explain the impact of the perfectly competitive markets on the society; and
3. compare the model of perfect competition to the real-world markets.

PRETEST

Directions: Choose the letter of the best answer and write it on a separate sheet of
paper.

1. It is the maximum amount for a consumer who is willing to pay for an

additional good or service.
A. total benefit
B. average benefit
C. marginal benefit
D. none of the above
2. It refers to the change in the total production cost that comes from
making or producing one additional unit.
A. total cost
B. average cost
C. marginal cost
D. none of the above
3. Prices in an unregulated market economy that has achieved productive
efficiency are likely to be ________.
A. below-average cost
B. above-average cost
C. equal to the minimum average cost
D. none of the above
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4. Which of the following statements is NOT TRUE?
A. The market efficiency results from the optimization of resource-use
to best serve an economy.
B. The marginal benefit for a consumer tends to increase as
consumption of the good or service increases.
C. A marginal benefit is an additional satisfaction that consumer
receives when the additional good or service is purchased.
D. None of the above

5. Which of the following statements is NOT TRUE?

A. Allocative efficiency means when the mix of goods being produced
represents the mix that society most desires.
B. Productive efficiency means given the available inputs and
technology, it’s impossible to produce more of one good without
decreasing the quantity of another good that’s produced.
C. A marginal benefit is an additional satisfaction that consumer
receives when the additional good or service is purchased.
D. None of the above

RECAP

Directions: Differentiate the two government policies. Write your answer in the
table below.

Government Policy Definition Purpose

1. Fiscal Policy

2. Monetary Policy
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LESSON

Efficiency in Perfectly Competitive Markets

In economics, the marginal cost of production is the change in the total

production cost that comes from making or producing one additional unit.
Meanwhile, a marginal benefit is the maximum amount for a consumer is willing to
pay for an additional good or service. It is also the additional satisfaction or utility
that a consumer receives when the additional good or service is purchased. The
marginal benefit for a consumer tends to decrease as consumption of the good or
service increases. When profit-maximizing firms in perfectly competitive markets
combine with utility-maximizing consumers, something remarkable happens: the
results of the quantities of outputs of goods and services demonstrate both
productive and allocative efficiency.

Productive efficiency means producing at the lowest cost possible without any
waste. The quantity of output supplied is within the production possibilities frontier.
In the long-run of a perfectly competitive market, the price in the market is equal to
the minimum of the long-run average cost curve. Hence, the goods are being
produced and sold at the lowest possible average cost.

Allocative efficiency means that among the points on the production possibility
frontier, the point that is chosen is socially preferred. It means that businesses
supply what people demanded. In a perfectly competitive market, the price is equal
to the marginal cost of production. Think about the price that is paid for a good as a
measure of the social benefit received for that good, after all, willingness to pay takes
what the good is worth to a buyer. Then think about the marginal cost of producing
the good as representing not just the cost for the firm, but more broadly as the social
cost of producing that good. When perfectly competitive firms follow the rule that
profits are maximized by producing at the quantity where the price is equal to
marginal cost, thus they are ensuring that the social benefits received from
producing a good are in line with the social costs of production.

To explore what is meant by an allocative efficiency, it is useful to walk

through an example. First by assuming that the market for wholesale flowers is
perfectly competitive, so P = MC. Now, consider what it would mean if the firms in
that market produced a lesser quantity of flowers. At a lesser quantity, marginal
costs will not yet have increased as much, so that price will exceed marginal cost;
that is, P > MC.
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In that situation, the benefit to society as a whole of producing additional

goods, as measured by the willingness of consumers to pay for marginal units of a
good, would be higher than the cost of the inputs of labor and physical capital needed
to produce the marginal good. In other words, these gains to society as a whole from
producing additional marginal units will be greater than the costs.

Conversely, consider what it would mean if, compared to the level of output at
the allocatively efficient choice when P = MC, firms produced a greater quantity of
flowers. At a greater quantity, marginal costs of production will have increased so
that P < MC. In that case, the marginal costs of producing additional flowers are
greater than the benefit to society as measured by what people are willing to pay. For
society as a whole, since the costs are outstripping the benefits, it will make sense
to produce a lower quantity of such goods.

When perfectly competitive firms maximize their profits by producing the

quantity where P = MC, they also assure that the benefits to consumers of what they
are buying, as measured by the price they are willing to pay, is equal to the costs to
society of producing the marginal units, as measured by the marginal costs the firm
must pay—and thus that allocative efficiency holds.

Impact of Efficiency in Perfectly Competitive Markets

The statements that a perfectly competitive market, in the long run, will
feature both productive and allocative efficiency do need to be taken with a few grains
of salt. Remember, economists are using the concept of “efficiency” in a particular
and specific sense, not as a synonym for “desirable in every way.” For one thing,
consumers’ ability to pay reflects the income distribution in a particular society.
Thus, a homeless person may have no ability to pay for housing because they have
insufficient income.
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Perfect competition, in the long run, is a hypothetical benchmark. For market
structures such as monopoly, monopolistic competition, and oligopoly, which are
more frequently observed in the real world than perfect competition, firms will not
always produce at the minimum of average cost, nor will they always set price equal
to marginal cost. Thus, these other competitive situations will not produce productive
and allocative efficiency.

Real-world markets include many issues that are assumed away in the model
of perfect competition, including pollution, inventions of new technology, poverty
which may make some people unable to pay for basic necessities of life, government
programs like national defense or education, discrimination in labor markets, and
buyers and sellers who must deal with imperfect and unclear information. However,
the theoretical efficiency of perfect competition does provide a useful benchmark for
comparing the issues that arise from these real-world problems.

ACTIVITIES

Activity: Let Me Think

Directions: Read and answer the questions below. Write your answer in the box.
1. Productive efficiency and allocative efficiency are two concepts achieved in the long
run in a perfectly competitive market. In fact, these two types of efficiency are the
reason we call it a perfectly competitive market. How would you use the concepts of
productive efficiency and allocative efficiency to analyze other market structures?

2. Explain how the profit-maximizing rule of P=MC leads a perfectly competitive

market to be allocatively efficient.
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WRAP-UP

To summarize what you have learned in the lesson, answer the following
questions:

1. What is productive efficiency? allocative efficiency?

2. What is the impact of the perfectly competitive markets on society?

VALUING

Reflect on this!

“Efficiency is doing better what is already being done.”

― Peter Drucker

POSTTEST

Directions: Read each statement carefully. Write T if the statement is correct,

otherwise write F.

____________1. Allocative efficiency means when the mix of goods being produced
represents the mix that society most desires.

____________2. Productive efficiency given the available inputs and technology, it’s
impossible to produce more of one good without decreasing the
quantity of another good that’s produced.

____________3. Perfect competition creates equality of well-being for the citizens of a

country.

____________4. Perfect competition guarantees that marginal cost will be maximzed.

____________5. The marginal cost of producing goods is exactly reflected in the prices
charged for goods.
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KEY TO CORRECTION

5. D 5. T
4. D 4. F
3. C 3. F
2. C 2. T
1. C 1. T
PRETEST POSTTEST:

References
Banton, Caroline. "The Definition of Efficiency." Investopedia. February 06, 2020.
Accessed August 24, 2020.
https://www.investopedia.com/terms/e/efficiency.asp.

Course Hero, Inc. "Efficiency of Perfect Competition." Course Hero. Accessed August 24,
2020. https://www.coursehero.com/sg/microeconomics/efficiency-of-perfect-
competition/.

"Efficiency in Perfectly Competitive Markets (article)." Khan Academy. Accessed August

24, 2020. https://www.khanacademy.org/economics-finance-
domain/microeconomics/perfect-competition-topic/perfect-
competition/a/efficiency-in-perfectly-competitive-markets-cnx.

Kenton, Will. "Marginal Benefit." Investopedia. August 22, 2020. Accessed August 24,
2020.https://www.investopedia.com/terms/m/marginalbenefit.asp#:~:text=A
marginal benefit is a,an additional good or service.&text=The marginal benefit for
a,the good or service increases.

Learning, Lumen. "Microeconomics." Lumen. Accessed August 24, 2020.

https://courses.lumenlearning.com/wmopen-
microeconomics/chapter/efficiency-in-perfectly-competitive-markets/.

Tuovila, Alicia. "Marginal Cost of Production Definition." Investopedia. August 08,

2020. Accessed August 24, 2020.
https://www.investopedia.com/terms/m/marginalcostofproduction.asp.