Question

What does it mean to say that markets promote an efficient outcome for society? Explain the ways or mechanisms by which markets can promote efficiency.

Answer 1

Markets are places, where producers as well as sellers of goods and services interact with one another, so as to make profits for each other.

As a producer, I would be interested in selling my product at the highest possible price so as to avail the best possible profit margins. This is known as the producer maximizing their profits which is the very reason for their existence.

On the other hand, as a consumer I would have an additional incentive to consume the best quality product at the lowest possible price. This is known as consumer maximizing their satisfaction in a market.

The market allows, both the interest of the consumers as well as producers in the society to be maximized. When these two groups of the society interact with one another, markets become places which allow for an equilibrium price to be set.

This can further be explained with the help of the following example: -

In the graph above, we see that the demand curve is downward sloping, indicating that at low prices the demand is higher. Similarly, the supply curve is upward sloping indicating that at higher price the supply is higher. At some positions, the demand is greater than supply indicating that prices are lower. On the contrary when prices are higher, supply is high as well.

The optimum outcome is when both these players meet and are able to decide that what the best price for purchase and sale of the good would be for the society at large. This price is what is set by the market and the forces of demand and supply and achieving this price would be impossible without the existence of markets which is how they contribute towards developing an efficient outcome for the society at large.

Please feel free to ask your doubts in the comments section.