00:01
In order to understand how price equals marginal cost can lead to allocative efficiency in a perfectly competitive market, we have to understand what exactly allocative efficiency is.
00:10
It is when goods, it is a point at which goods are placed to the most efficient allocation for society.
00:21
So at price equals marginal cost, the benefit to the consumer, so consumer benefit is, or the consumer, consumer's willingness to pay is equal to the cost to society, the cost to society.
00:40
So the marginal benefit would be equal to the marginal cost in total.
00:45
We can look at our usual supply and demand curve, excuse me, we can look at our usual supply and demand curve and see that if we treat demand as marginal benefit and supply as marginal cost, if we do not produce at the point over here at this optimal point, and instead we produce over here, produce at this quantity and this price, we have a disparity between what consumers are willing to pay and what suppliers are willing to sell for.
01:25
There's this disparity here.
01:27
But when we go the other direction, we charge this much at this.
01:33
Quantity, what consumers are willing to pay is very different than what consumers are willing to pay.
01:42
There's this difference over here...