A) Explain why a perfectly competitive firm might be regarded as statically efficient while a monopoly might be regarded as dynamically efficient.

In perfect competition there are four main characteristics, many buyers and sellers, all firms and consumers enjoy perfect knowledge of market conditions, the products are all homogenous and there is complete freedom to entry and exit the market in the long run since there are no barriers to entry as cost advantages constitute a barrier to entry. Such a market is therefore perfectly contestable. Static efficiency is concerned with the most efficient combination of resources at a given point in time. For example static efficiency involves the concept of productive efficiency – producing at the lowest point on the short run average cost curve. A monopoly on the other hand is a market which only one seller operates however from a legal point of view the market share has to be in excess of 25%; such a definition is required because a market share of this magnitude may be sufficient to confer substantial control over prices. Dynamic efficiency is concerned with innovation and investment which will reduce the long run average cost curve. Improving dynamic efficiency will result in an increase in costs in the short term but benefits will be seen in the long run.
Perfect competition involves price taking therefore the demand curve of the seller is horizontal so that when the industry is in equilibrium p=MC giving allocative efficiency and p=MC where AC is minimised giving productive efficiency. The structure of the industry gives static efficiency due to price seeking behaviour which drives down costs by eliminating inefficient firms. Monopolies tend to be large companies who achieve economies of scale which acts as a barrier to entry. Monopolies achieve abnormal profit which provides funds for investment to maintain a