Question

1 Economists tend to like markets where producers and consumers are price-takers because, assuming there are no externalities, the market equilibrium is also the efficient outcome.

2. Grapes are a major input into wine production. Suppose a new fertilizer is developed which reduces the cost of producing grapes. This new fertilizer will result in excess supply of wine in the market.

3. Economics as a discipline deals only with logical deduction. Economists should never make claims which embody moral- or value-judgments.

Answer 1

1. Perfectly Competitive markets produce efficient outcomes, in the sense that they make sure the society welfare is maximised.

There is a maximization of allocative and productive efficiency in the long run.

a) Productive Efficiency: With the onset of flexibility of entry and exit from the market in the long run, firms who remain in the industry are the ones who produce the good at minimum average cost. Thus, there is huge efficiency in production in the long run with goods being produced at lowest possible costs, which gets along with it the benefits of profit maximization for the firms.

b) Allocative Efficiency: This concept refers to the best possible provision of the good. The price charged in a perfectly competitive market is where it is equal to the marginal cost of production. The welfare for consumers is maximised since they are charged at the 'true marginal cost' which does not account for added mark-ups by the firms. This is equivalent to their marginal willingness to pay for a product. Thus, the societal welfare is maximised as well.

Therefore, the mentioned statement is TRUE.

Perfectly Competitive markets are the most efficient ones, which maximize market efficiency.

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