Question

Using a graph, explain why a competitive market in which the price is lower than the market equilibrium is not Pareto efficient.

marks =

• Was Pareto Efficiency defined?
• Was the graph correct?
• Was the answer correct?
• Was the explanation detailed?

Answer 1

A Competitive market where price is lower than the Equilibrium price is not a pareto efficient market.

So graph not correct

Answer not correct

Pareto efficiency not defined

I will explain each of these in detail-------

A pareto efficient market is such a market situation in the economy where all the resources are efficiently and economically utilised and any chaNge in the allocation of resources by one firm will make the other one worse off.

When one firm charges less than others, he can sell more as demand will be greater but some other firm will loose as that firm will not be able to sell as much Quantity as he can produce.It is called pareto inefficiency.

I will explain you with the help of graph of a Competitive market of pens..

* The graph shows the Equilibrium point E( D=S), as the pareto efficient point.,with Equilibrium price Q(=$5)& Equilibrium quantity (=5)

* There is maximum amount of economic surplus ,consumer surplus ( shaded area PQE) and producers surplus ( shaded area OQE).

* There is no deadweight loss to the society.

* Now ,if price is determined below equlibrium price (=$4), at this point, demand is greater than supply ,and the firm can sell 6 units to accommodate the increased demand.

,*In this case,the consumers surplus increases to PLF while producers surplus shrinks to OLM.

* It means the action of one firm makes some other firm worse off as other firm is not capable of selling the optimal Quantity.,and there is deadweightloss to other firm.