ECONOMICS

Economics

Economics

Introducing Minimum Price above the Equilibrium Price Reduces Social Welfare

There are price floors are minimum prices which are set by governments for some specific commodities which are believed as being sold in very low prices in an unfair setting. This is the reason that the producers in such cases are in need of some assistances. These price floors are considered to be an issue in situations where they are being set above equilibrium prices, as they do not have any effect in situation where they are set even below the market clearing prices. On the other hand where they are set above market prices, in such scenario possibility exist that excess supply (surplus) is possible. In such kind of scenario, producers which are not able to foresee possible troubles will be producing larger quantity, this is where new price intersects their supply curve. Due to the lack of knowledge, consumers won't find themselves able of buying many goods at higher prices and this will increase the inventory count (Lipsey and Chrystal, 1999). 

This might be causing economic harm ultimately even in the case where the suppliers are looking ahead and getting an idea that there are not sufficient demands and cut backs in producing in response. This is the reason that there is still deadweight loss associated with all these reductions in quantity, and this is reflected in loss of the consumers as well as producers surplus at a very lower level of production. Although the producers might also gain as a result, but this is possible only in a scenario where their supply curve is found to be relatively elastic and as a result they have no net losses. This is definitely going to cause loss for the consumers due to the fact that some people are priced-out of market while others are going to pay higher price at the same time (Gu and Wenzel, 2011; Lipsey and Chrystal, 1999).

Perfectly Competitive Markets Lead To an Allocatively Efficient Allocation of Resources In The Long Run

Allocative efficiency is a condition which is achieved when all the resources are allocated in a manner which allows the profit maximization with maximum possible usage. In a situation where efficient allocation of resources is achieved, well-being becomes impossible to be increased of someone without causing harm for the other person.

The term “Economic efficiency” is used for the most vital concepts in the context of economics, which is used as criteria while judging the methods in which market structures like perfect competition and others affect resource allocations of an economy. For making such kind of judgment one must be familiar to different types of economic efficiencies, which are inclusive of productive efficiency and allocative efficiency.

Productive efficiency is a situation which occurs in a situation where firms produce at lowest point on the average cost curve. Allocative efficiency is on the other hand a situation which requires that price of good is equal to the marginal cost of production. The illustration below is demonstrating the fact that ...