Equilibrium Price Increases Social Welfare
ECONOMICS FOR BUSINESS
SID: 1210497
Explain why the introduction of a minimum price above the equilibrium price reduces social welfare
In a free market demand and supply alone determine the price. This means that quantity of demand and quantity of supply equate at this point is where the price is set which is therefore called equilibrium price. (Griffiths, 2011)
Figure 1 illustrates where supply and demand intersect, this being the Equilibrium price and Quantity, shown by P1 and Q1. If we introduce a minimum price above the equilibrium price it creates excess supply …show more content…
This is illustrated by Figure 3.
(Griffiths, 2011)
If the government set the minimum wage level above equilibrium there would be an excess supply of labour by Qd - Qs. In this case instead of the market price falling due to excess supply it would be the level of employment falling due to excess supply of labour. This would be due to employers having to reduce the numbers they employ due to the increase in the minimum price, thereby reducing social welfare.
.
Explain why a profit maximizing firm produces the output that equates marginal revenues to marginal costs (MR=MC)
A profit maximising firm would strive to operate at the point where the output equates marginal revenue to marginal costs, where marginal revenue is the revenue generated from the sale of 1 more unit and marginal costs are the costs incurred by the production of that unit. (Griffiths, …show more content…
Shown in figure 5 at Q1 profit is generated as Marginal revenue is greater than marginal cost. At Q2 the output has increased, profit is still generated at a lower rate as marginal revenue decreases as output increases but this is still not the profit maximising point. Profit maximization occurs only at Q3 where MR=MC and this is output a profit maximizing firm would produce.
3. Explain why perfectly competitive markets lead to an allocatively efficient allocation of resources in the long run.
Allocative efficiency is achieved when the value the consumers place on a product equates to the cost of the resources used up in production. This is when price (P) is equal to marginal cost (MC), when this is achieved, total economic welfare is maximised. (Tutor2u, 2013)
According to Griffiths (2011) in perfect competition the firm is the price taker, meaning they have no influence in the ruling market price and the price must be accepted and there is freedom of entry and exit so that firms can enter and leave the market with no barriers to discourage entry or
SID: 1210497
Explain why the introduction of a minimum price above the equilibrium price reduces social welfare
In a free market demand and supply alone determine the price. This means that quantity of demand and quantity of supply equate at this point is where the price is set which is therefore called equilibrium price. (Griffiths, 2011)
Figure 1 illustrates where supply and demand intersect, this being the Equilibrium price and Quantity, shown by P1 and Q1. If we introduce a minimum price above the equilibrium price it creates excess supply …show more content…
This is illustrated by Figure 3.
(Griffiths, 2011)
If the government set the minimum wage level above equilibrium there would be an excess supply of labour by Qd - Qs. In this case instead of the market price falling due to excess supply it would be the level of employment falling due to excess supply of labour. This would be due to employers having to reduce the numbers they employ due to the increase in the minimum price, thereby reducing social welfare.
.
Explain why a profit maximizing firm produces the output that equates marginal revenues to marginal costs (MR=MC)
A profit maximising firm would strive to operate at the point where the output equates marginal revenue to marginal costs, where marginal revenue is the revenue generated from the sale of 1 more unit and marginal costs are the costs incurred by the production of that unit. (Griffiths, …show more content…
Shown in figure 5 at Q1 profit is generated as Marginal revenue is greater than marginal cost. At Q2 the output has increased, profit is still generated at a lower rate as marginal revenue decreases as output increases but this is still not the profit maximising point. Profit maximization occurs only at Q3 where MR=MC and this is output a profit maximizing firm would produce.
3. Explain why perfectly competitive markets lead to an allocatively efficient allocation of resources in the long run.
Allocative efficiency is achieved when the value the consumers place on a product equates to the cost of the resources used up in production. This is when price (P) is equal to marginal cost (MC), when this is achieved, total economic welfare is maximised. (Tutor2u, 2013)
According to Griffiths (2011) in perfect competition the firm is the price taker, meaning they have no influence in the ruling market price and the price must be accepted and there is freedom of entry and exit so that firms can enter and leave the market with no barriers to discourage entry or