Question

Demand Curve: P 10-20 Supply Curve: PQ +3 At Equilibrium: Po P Therefore, to find Equilibrium Quantity: 10-20-0+3->0-2.33 (2 dp) To find Equilibrium Price: P03- 2.33 +3> $5.33 (2 dp) Equilibrium Point, A: (Q-2.33, P $5.33) Price (s) 15 14 13 12 10 9 8 7 6 p*s-Equilibrium Point, A 4 2 Quantity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Explain why the equilibrium price and quantity is Pareto efficient. As part of your explanation, you must explain what is Pareto efficiency and show that it fits this definition.

Pareto efficiency refers to a market equilibrium that is perfectly competitive. A market is considered Pareto efficient where any change to the price from its equilibrium level would cause in a reduction of the total surplus (area shaded in blue). Thus, any reduction in the total surplus would cause a change in the consumer and producer surpluses rendering either the consumer or producer better off at the expense of the other becoming worse off. The market for microphones is Pareto efficient because any attempt to move the price from its equilibrium level (P*=$5.33) would result in a reduction of the total surplus for buyers and sellers of microphones.

For example, if we increased the price for microphones, the quantity demanded would reduce and the total surplus would decrease. Likewise, if we reduced the price for microphones, the quantity supplied would fall and the total surplus would decrease. Therefore, in the absence of a Pareto improving transaction, it can be concluded that the market for microphones is Pareto efficient at the equilibrium price of $5.33.

Answer 1

Perfect competition is productively and allocatively efficient. It is Pareto efficient, which means resources are used most efficiently and one person cannot be made better off without another person being made worse off.

In perfect competition, P=MC. Marginal benefit equals marginal cost. Marginal benefit is the marginal revenue or price that a consumer pays.

Marginal cost is the cost of producing an additional unit of output.

In perfect competition since P=MC, it is allocatively efficient.

The perfectly competitive firm is also productively efficient, since it produces at the lowest point of ATC.