Explain how the diagram for a perfectly competitive firm demonstrates static efficiency.
Productive efficiency can be demonstrated by the firm's price relative to the Short Run Average Total Costs curve. By selling output at P1, (where MR=MC), it is selling at the minimum point on the SRATC curve therefore minimising costs of prodution and so the firm is productively efficient.
Allocative efficiency is shown by the interception of the Price with the Marginal Cost curve, demonstrating that P=MC and so the price of each good reflects the cost of producing such good.
X-efficiency is also shown in the diagram as the price for which the good is sold lies on the SRATC rather than above it, showing that there is no organisational slack in the firm.
RB
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