Demand & Supply: Market Efficiency

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Information about Demand & Supply: Market Efficiency

Published on September 19, 2013

Author: arvindtirkey


Market Efficiency : Market Efficiency Demand & Supply IB DP Economics PowerPoint Presentation: Market Efficiency: CONSUMER SURPLUS D S Quantity Price ($) 0 12 10 4 18 14 8 16 6 12 10 20 2 Equilibrium price of thingies is $10 and the equilibrium quantity demanded and supplied is 12 thingies. Forces of demand and supply determines this equilibrium. At this equilibrium, there can be some consumers who are prepared/capable/willing to a higher price for the thingies. At this equilibrium, as seen in the demand curve, there would still be people demanding 2 thingies at $20, and be demanding 4 thingies at $18. However, consumers don’t have to pay $20 or $18, but they just have to pay the equilibrium price. This means that all consumers that purchased first eleven thingies have made a gain as they only had to pay equilibrium price of $10, whereas they were willing/capable of paying more than $10. In this case, consumers willing to pay $20 for 2 thingies are gaining, as they are paying less and getting more thingies. This gain is the consumer surplus. Shown as blue triangle. An area under demand curve and above equilibrium price. Market Efficiency: PRODUCER SURPLUS : Market Efficiency: PRODUCER SURPLUS D S Quantity Price ($) 0 12 10 4 2 6 8 4 6 8 10 1 2 On the other hand, at equilibrium price, some production of thingies would take place at a price lower than $10. This can be seen in the supply curve. At a price of $8, there would still be 10 thingies supplied. At price of $6, there would still be 8 thingies supplied, so on and so forth. However, producers doesn’t have to sell/supply for $8 or $6 or $4 or $2, but they can sell their thingies at equilibrium price. This means that producer have made a gain on each of the first 11 thingies in terms of what they would have accepted for them. Since producer received a higher price than the one she was prepared/willing to accept, it is a gain. This is concept of producer surplus. Shown by the blue triangle, which is an area above supply curve and below the equilibrium price. P roducer was willing to supply a thingy for as little as $1, but she received $10 for each thingy due to the equilibrium price at $10. Producer gained. Allocative efficiency: Allocative efficiency D S Price ($) 0 Q P Quantity Market is in equilibrium. Ceteris paribus. It is socially efficient or in a state of allocative efficiency. Society’s point of view: resources are allocated in the most efficient way. When both consumers & producers are gaining and having surplus then the whole community is getting benefited. What state is this? When we add consumer & producer surplus, what do we get? Consumer surplus Producer surplus + S – Marginal social cost (MSC) D – Marginal social benefit (MSB) ( m arginal utility) In a market supply curve is determined by the industry’s cost of production. This cost of production is actually the cost to society, hence is social cost curve. In efficiency analysis, supply curve is known as Marginal Social Cost. Demand curve is determined by utility, or benefits, that the consumption of a good or service brings to the consumers. Benefit in the market: consumers gain & producer’s gain = social gain, then demand curve represents social benefits. In efficiency analysis demand curve is known as marginal social benefit curve (MSB). COMMUNITY SURPLUS

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