' A firm should be encouraged to maximise profits because this makes it efficient.' Discuss whether this argument is true for a firm operating in an imperfect market.
Economics- Efficiency and Profit maximisation watch
- Thread Starter
- 27-07-2016 12:46
- 14-08-2016 09:51
I'm guessing you're interested in understanding how to answer a question of this type.
Firstly, you would have to explain what is meant by efficiency, both productive and allocative. In the context of a firm, this means operating at the lowest point of the lowest AC curve, and operating where P=MC, relatively.
Then you should show that a firm in imperfect competition cannot satisfy these conditions and maximise profits at the same time. Thus, for an imperfectly competitive firm, profit maximisation does not equal efficiency. The argument is not true.
It would also be helpful to show the contrasting view of a perfectly competitive firm, where profit maximisation and economic efficiency occur at the same point.
Hope this helped!