A key factor in determining market performance is how efficiently a firm uses available resources. This efficiency will determine if a firm can survive in a particular market where competition exists. In an ideal situation, perfect competition occurs when new firms are allowed to join a market and have equal access and acquisition cost of resources. Therefore with competition in place, firms will be forced to be more efficient in its production of goods/services.
Efficiency not only leads to less wastage of resources, but consumers can benefit from the possible fall in prices. Unfortunately, in any market, there are factors that might prohibit or lessen the level of competition within a market preventing the benefits discussed. This is where the significant importance of microeconomic reform (MER), which consists of government policies designed to increase the level of efficiency, is evident. Deregulation, trade liberalization and the forming of regulatory authorities such as the Australian Competition and Consumer Commission (ACCC) are examples of such policies.
Microeconomic reform is needed if market efficiency and its benefits are to be achieved. There are three classifications of efficiency. Allocative efficiency refers to the best choice of resource for a specific part of the production, which will lead to minimal wastage. Technical efficiency refers to the best combination of resources to produce the most quantity and best quality of a product. Lastly dynamic efficiency is the adoption of new techniques and technologies, and keeping up with the changes in demand.
Non-competitive markets are examples of inefficient use of resources. Take for example a monopoly. A monopoly is a market form where there is only a single producer of a product. This can lead to higher prices for consumers as the monopoly dominate the entire market and the goal of the firm is profit maximization.