To be allocative efficient in perfect competition means to produce exactly the right stuff at exactly the right amount. This means that the product you are producing is high in demand and you are producing the exact amount that there is a demand for. Stated differently, this means you are not producing too little, because then you would make less profit than you are actually able to, but you are also not producing too much because then you have wasted product and you begin to lose money.

Mathematically speaking, Price is equal to Marginal Cost (P=MC).

*Also, when a perfect competition is acheiving allocative-efficiency, both the consumer producer and surpluses are maximised.
allocative.jpg

This graph shows that when Price is equal to Marginal Cost, BOTH producer and consumer surplus are maximised and this firm could be in no better situation.



This video is a clip from outside the apple store in Manhattan the day the new iPhone was released. Hundreds of people camped out and waited in line to make sure they got one because apple was not guaranteeing to be allocative efficient in that they might have not produced enough of the product for the demand.

Question

A perfect competition is achieving allocative-efficiency when...
a. consumer surplus is maximized
b. producer surplus is maximized
c. both consumer and producer are maximized
answer: c

Links:
allocative efficiency
more detail on perfect competition
another angle on allocative efficiency