Question

6. Use a supply and demand model to illustrate how one might argue that from the equilibrium price, there is no way to make some people better off without making other people worse off. In your model, be sure to clearly identify changes in consumer, producer, and total surplus that result from deviations from the equilibrium price.

7.Your text argues the following: “Markets are a remarkably effective way to organize economic activity: they generally make society as well off as possible given the available resources.” Describe how your text arrives at this conclusion.

8.What does it mean to say that markets are usually efficient? How does the assumption of ability to pay work to produce the argument that the market equilibrium is efficient? How does our particular conception of producer cost work to produce the argument that the market equilibrium is efficient?

9. How is the concept of opportunity cost related to the idea of a “right to buy” a good?

Answer 1

6 )

Equilibrium is established where demand and supply are equal. Equilibrium price and quantities are regarded as the optimal ones. If there is deviation from this, it shall lead to inefficient outcomes. Rise in price above the equilibrium will debar many consumers and many would have to pay higher price ones. Thus, Consumer surplus shall fall and producer surplus would rise. For making producers better off, consumers are made worse off.

Likewise, price below the equilibrium would reduce the supply of goods and producers would be made worse off by depleting their producer surplus.

7)

This is not true statement completely. Criticisms can be leveled against this statement. Usually, market forces demand and supply decides the economic activities in market based economy. These forces must reflect the true demand and supply prevailing in the market but if these force do not reflect so, there might be flawed outcomes.

These demand and supply forces do not take into account the externalities. These externalities could be positive or negative. Thus, results or outcomes are not efficient ones.