The market price of a good equates theof production and thevalue that consumers attach to a unit of the good. Because the price also reflects theof the resources employed to produce the last unit, consumers will value the last unit they purchase at least as much as they would value any other good that those resources could have produced. These characteristics of perfectly competitive markets guaranteeefficiency.

Demand curves reflect the marginal value that consumers attach to each unit of a good, and supply curves represent the marginal cost of production to the firm. Therefore, the market price equates these two values at the intersection of the curves. If the marginal cost is higher than the price that consumers are willing to pay, the firm is producing too much and should cut back on production until its marginal cost is equal to marginal benefit to the consumer. Resources will then be diverted away from the production of the good and toward other uses. If the marginal cost is lower than the price that consumers are willing to pay, the firm should increase the production of the good until, again, the marginal cost equals marginal benefit to consumers. This diverts resources away from other uses and into the production of the good. In this way, competitive markets direct resources away from production that is not allocatively efficient. While the previous characteristics guarantee allocative efficiency in the short run, they do not guarantee productive efficiency. Productive efficiency occurs when a firm produces at the minimum point on its long run average cost curve so that the market price equals the minimum average cost. In the long run, this is guaranteed by the fact that a market price above the minimum point on the curve would induce new firms to enter the market, and a market price below this point would force the least efficient firms out of the market. In the short run, however, this may not be the case.