Explain what is meant by market efficiency.

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pohnpei397 eNotes educator| Certified Educator

Market efficiency is the idea that markets, when left to themselves, will always result in the production of the exact "right" amount of a good or service.  When market efficiency has been achieved, there will be no customers left who would like to have bought a good or service at the prevailing price.  Similarly, there will be no suppliers left who still had goods or services they would have liked to sell at that price.

Market efficiency relies on prices being free to move and suppliers being free to increase or reduce production.  When these conditions exist, there will be market efficiency.  If a shortage of a good or service develops, the price will rise or producers will produce more of the good or service.  If a surplus develops, the price will fall or the producers will reduce production.

When these things happen, an equilibrium will eventually be reached at a price and quantity where all demand has been met and all supply has been sold.