In: Economics
2.) How do changes in supply/demand impact prices and the quantities of good produced/consumed? How do these changes impact economic efficiency?
As the fundamental law of demand states that, there is inverse
relation between demand for commodity and its price. When the
demand increases the price will fall down. Now the law of supply
states that when supply increases the price will increase. There is
an increase in demand leads to excess demand to develop initial
price. This excess demand leads cause fall in price. On one hand
the increasing supply cause the fall in price and rise in quantity
demanded. On the other hand, fall in supply create excess demand at
initial price. This excess demand cause the increasing price and
decreasing the quantity demanded. If a decrease in demand and
increase in supply cause fall in equilibrium prices with no change
in quantity demanded. With an increase in demand and decrease in
supply, the rise in equilibrium prices with indeterminate change in
quantity demand. If both demand and supply increased, the
equilibrium output increased and indeterminate change in price.
Both demand and supply fall down, the quantity demanded fall down
and no change in price.
Economic efficiency can be attained through efficient allocation of
scarce resource to meet the needs and wants of the people. The
distribution should be equal for all. The changes in the price of
necessary goods affect the consumption bundle of common people.
When the price of normal goods increased, this people cannot
consume that, so there consumption decreased and it will leads to
poverty and some other social issues. The different types of
efficiency are productive, efficiency in allocation, dynamic,
efficiency in scale and social efficiency.