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Chapter 5

ECON101 Chapter 5: Chapter 5. Efficiency and Equity (3)

Course Code
Corey Van De Waal

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Is the Competitive Market Efficient?
So, the market demand curve for a good/service tells us the marginal
social benefit from it
And the market supply curve of a good/service tells us the marginal
social cost of producing it
Equilibrium in a competitive market occurs when the quantity
demanded = the quantity supplied
- At the intersection of the demand curve and the supply curve
- At this intersection, marginal social benefit on the demand curve
= marginal social cost on the supply curve
- This equality is the condition for allocative efficiency
- So in equilibrium, a competitive market achieves allocative
The sum of consumer surplus and producer surplus: total surplus
- When the efficient quantity is produced, total surplus is
- Buyers and sellers acting in their self-interest end up promoting
the social interest
Market Failure
- When a market is inefficient, the outcome is market failure
- Either underproduction or overproduction is produced
- Underproduction example: The quantity of pizzas produced is
5000 a day. Consumers are willing to pay $20 for a pizza that costs
only $10 to produce the quantity produces is inefficient
- Underproduction total surplus is smaller than its maximum
possible level
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