Economic Question?

Question

At what point is a market for a particular good or service operating at "economic efficiency"?

At that point of economic efficiency, what exactly is in balance?

In cases where prices are below (and above) the "market-clearing price" will we have a shortage or surplus? (Which one in which case?)

Answer 1

I guess it means when supply keeps up with demand

Answer 2

There are two types of efficiency in economics one is productive efficiency and the other is allocative efficiency. I guess if you have both you have economic efficiency.

So basically to have economic efficiency you need goods being produced the cheapest way possible and allocated to those who value it the most. Now comes the question of how much to allocate basically if you produce one more and the increase in costs is less than the increase in benefit you should produce it. So you continue producing until the increase in benefit equals the increase in costs.

In a market with some pretty serious assumptions (perfect information, perfect competition, no externalities) This acheived by the market price. Given the assumptions when the price reaches a point where quantity supplied equals quantity demanded we have economic efficiency.

Price above the market clearing price causes producers to want to produce more and consumers to want to consume less thus we have a surplus. Draw the s and d and draw a line above the market clearing price then look at the quantity demanded and the quantity supplied at that price that way you don't have to memorize

Answer 3

When we are at economic efficiency, we mean that supply and demand are balanced. All units produced are willing bought, and no more than the number produced are wanted.

If we are below the market clearing price or equilibrium price, then there will be a shortage, as more of the units will be demanded than are supplied. If we are above the market clearing price, there will be a surplus, as there will be more units produced than are wanted.

Hope this helps.

Answer 4

It would be economically efficient when the market is at the point of equilibrium, the price level where supply = demand. You don't have an over supply or under supply, the market is just right.


If the price is above the equilibrium point there will be an excess of supply as suppliers will make more product at that price but consumers will demand less at that price. To get rid of their stock they have to drop prices and it will make its way back down to equilibrium.

If the price is below then there will be excess demand. More will be demanded at this lower price but suppliers will not produce as much at this price. Prices will increase for the good as there are less and demand will start to drop until it moves back up to its equilibrium point.

Draw a demand and supply graph and pick a price above and below the equilibrium and just look at what it tells you about the quantity for supply and demand. That's the easiest way to understand it.

Answer 5

Economic efficiency indicates an equilibrium condition (supply=demand) so that the price is set at the marginal cost of production, and the marginal benefit received precisely offsets the marginal social cost of the resources utilized.

Shortage and surplus are easy to remember when you think of inventory on a store's shelves. Shortage means that all has been purchased but consumers' demand is unmet. Surplus means that items remain on shelf after consumers have bought their fill.

Answer 6

Kung, you have three good responses. See Theecono, Veritatu and Jonathan. The one guy is just plain wrong and the other guy is going in another direction than what you are looking for, even though he makes good sense. For your balance position we say Qd is in balance with Qs. Quantity demanded equals quantity supplied. Some folks are answering supply = demand, this is another way of saying the same thing.

Answer 7

In cases where the prices are below the clearing price you have a surplus of the product and vica versa.