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

Pareto Efficiency: Pareto Efficiency states that in any economic state to get one individual a better off the other individuals will have to worse off. In Pareto Efficiency the allocation of resources are done in such a way that they cannot be reallocated with a loss to any one of the party. In this there cannot be equality so some one have to loose for other person to gain.

Pareto Efficiency is widely used in economics because it helps to improve the allocation of resources to see that no one will get harm when one is benefits.

So even in demand and supply also the same will happen if the market price goes below equillibrium price the supplier has to loose. So producer surplus will decrease.

So if market price goes beyond equillibrium price the consumer have to pay more reducing consumer suplsur.

So any change will effect the total surplus.

Thus both Producer and consumer will try to sell and buy goods at equllibrium price as no one will loose. So in this case they are trying to achieve Pareto Efficiency.