The perfectly competitive firm achieves productive efficiency by producing at the minimum points of its average total cost curve in the long run. As we can see in Figure 10-3, the monopoly firm does not attain productive efficiency and produces in the rage of the average total cost curve where economies of scale are present if output were to be increased. From this, we can make two deductions. First, competition is desirable as inputs are used to their greatest potential efficiency. Secondly, regulators have a criteria to use when they regulate a monopoly firm.
Allocative efficiency is a measure of the allocation of productive inputs to their best use.
There are different ways that resources and productive inputs can be allocated. In a centrally planned economy, bureaucrats can devise elaborate schemes of where resources, labor and capital inputs can be allocated toward the production of specific goods and services. Alternatively, an economically superior method is to simply let markets decide how inputs should be allocated. A market is a collection of producers and consumers. If consumers demand more of a good, the price of the good will rise and producers will increase production.