Question

In: Economics

2.) How do changes in supply/demand impact prices and the quantities of good produced/consumed? How do...

2.) How do changes in supply/demand impact prices and the quantities of good produced/consumed? How do these changes impact economic efficiency?

Solutions

Expert Solution

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.


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