This week we will be wrapping up unit 1.1 from the IB Economics syllabus here in Zurich. The final topic to cover from this section of the course is the relationship between equilibrium in a competitive market and allocative efficiency. The video below explains why the most efficient result a market can hope to achieve occurs when the price and quantity are determined by the intersection of supply and demand. Any price and quantity combination other than that found at equilibrium will reduce overall efficiency and lead to a loss of societal welfare.
Discussion Questions about Efficiency:
- “The invisible hand of the competitive market results in a more efficient allocation of resources than prices set by a government can ever hope to achieve.” Explain the economic reasoning behind this statement.
- Why does the marginal benefit to consumers of a good decrease the greater the quantity of the good becomes available on the market? Why does the marginal cost to producers increase?
- How do competitive market forces assure resources will be efficiently allocated towards the provision of various goods and services? In other words, if the quantity in a market is not at equilibrium, why is it likely to move towards equilibrium over time?