Home / Summaries / Lecture 1 introduction and international trade theories / market-quantity-price

Book: Effiency and Equity - Is the competitive market efficient?

5 important questions on Book: Effiency and Equity - Is the competitive market efficient?

Equilibrium in a competitive market occurs when

The quantity demanded equals the quantity supplied at the intersection of the demand curve and the supply curve.

At this intersection point, marginal social benefit on the Demand Curve equals marginal social cost on the Supply Curve

This equality is the condition for allocative efficiency =in equilibrium, a competitive market achieves allocative efficiency.

Inefficient production creates a deadweight loss and is thus...

A social loss ( borne by the entire society)

Obstacles to efficiency that bring market failure and create deadweight loss are:

Price and quantity regulations
Taxes and subsidies
Externalities
Public goods and common resources
Monopoly
High transaction costs

Price and Quantity Regulations

Price regulations (examples: rent ceiling and minimum wage). Sometimes block the price adjustments that balance the quantity demanded and the quantity supplied= Lead to underproduction.

Quantity regulations: limit the amount that a farm is permitted to produce ( also leading to underproduction).

High transaction costs

Opportunity costs of making trades in a market

To use market price to allocate scarce resources it must be worth bearing the opportunity cost of establishing a market, for some its too costly to operate.

When transaction costs are high, the market might underproduce

The question on the page originate from the summary of the following study material:

Lecture 1 introduction and international trade theories

View summary