Managerial Decision Tools for the Efficiency of Perfect Competition: An Approach for Ensuring Economies of Scale in Perfectly Competitive Markets

Abstract

Perfect competition is an idealized market structure that achieves an efficient allocation of resources. The main focus of this manuscript is to elaborate the managerial decision model of perfectly competitive market structures which have a say to the ensuring economic and allocative efficiency and maximizing profit in the perfectly competitive industries. Accordingly, the main decision tools that firms use in the perfectly market competitive market structure are Marginal rate of technical substitution (MRTS) between any pair of inputs must be equal for all producers, marginal rate of substitution (MRS) between any pair of goods must be the same for all consumers and marginal rate of product transformation (MRPT) must be equal to the marginal rate of substitution for each pair of goods so that the firm is economically efficient.  To be allocatively efficient firms in the perfectly competitive industry should operate at the point where the demand curve and the supply curve intersect. Marginal revenue and marginal cost (MC) are compared to decide the profit-maximizing output. If MR > MC, then the firm should continue to produce.  If MR = MC, then the firm should stop producing the additional unit.

Keywords: managerial decision tools, economic efficiency, allocative efficiency, operation with zero economic profit, long-run equilibrium in perfect competition