Question

1- How does the demand curve show the marginal benefit received by consumers?

2- How does a supply curve show the marginal cost to producers?

3- What is a perfectly competitive market?

4- What can eliminate a shortage?

5-What can reduce a surplus?

Answer 1

1. The downward sloping demand curve shows the willingness to pay for the next unit of a particular good. In the following graph, as the price falls from P1 to P2 the consumer's demand increased from Q1 to Q2. Hence the benefit received by the consumer by consuming an additional unit of a good is referred to as the marginal benefit and the demand curve shows the benefit the consumer will receive if it consumes an additional unit of a good. Hence the demand curve reflects the marginal benefit received by the consumer.

b, The marginal cost is the additional cost that the producers have to bear if it produce an additional unit of a particular goods and services. In the diagram below, as the price of a good rises from P1 to P2 the quantity to be produced increases from Q1 to Q2. Now to produce Q2 the producer has to employ more workers and will have to purchase more inputs. As a result of which the cost of production rises as the level of output rises from Q1 to Q2. This increase in the cost of production to produce one additional unit of Q i.e Q2 reflects the marginal cost to the producers. Hence the supply curve shows the marginal cost to producers.

c. In a perfectly competitive market there are large number of sellers and buyers and each seller sells a homogenous or identical product and the market forces of supply and demand determine the equilibrium price and quantity in the market and as a result no firm has the power to influence the market price and each firm is a price taker in the market. There are free entry and exit in a perfectly competitive market and each firm earns zero economic profit in the long run. Profit maximizing condition in a perfectly competitive market is price=marginal revenue=marginal cost.

d. Shortage in a market is arise when the price is set at a level where quantity demanded becomes greater than the quantity supplied. In such a case to eliminate a shortage, price should increase and hence the quantity supplied will increase and eventually quantity demanded becomes equal to the quantity supplied and there will be no shortage in the market.

e. Surplus in a market is arises when price is set at a level where quantity demanded becomes smaller than the quantity supplied. In such a case to eliminate a surplus,price should fall and then quantity supplied will fall and eventually quantity demanded becomes equal to the quantity supplied and there will be no surplus in the market.