Question

Explain why economists believe that in standard markets the equilibrium is efficient, and welfare is maximised. Use and describe the fundamental assumptions and laws of economics.

Answer 1

Economists believe that at the equilibrium position, the demand forces equal the supply forces. It brings stability in the output demanded and supplied as well as prices. Besides, at the equilibrium level, there is neither surplus nor shortage in the economy. Hence, the scope of black market activities is eliminated if there is an equilibrium in the market. So, it is said by the economists that there is an efficiency achieved and total surplus is maximized in the economy at equilibrium.

The equilibrium position is also achieved when the demand forces always put downward pressure upon the prices, whereas the supply forces put upward pressure upon the prices. When these forces, intersect each other, a stability is achieved in the economy. Here, it is the assumption that there is no taxation applied in the economy. Another assumption that there is sufficient supply to at each price level to cater the demand. The third assumption is that world prices are not affecting the domestic market.