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Efficiency of market equilibrium · Part 1 of 4
12 exam-style questions with model answers, plus 15 quick multi-choice questions — every question on this part of the standard, grouped by the 4 pages of notes they come from.
Write a full answer before you reveal the model one. That comparison is where the learning happens.
Explain the difference between demand and quantity demanded.
In an illustrative market for building materials, the equilibrium price is $40 per unit. A regulation temporarily holds the price at $55. At $55, quantity demanded is 12,000 units and quantity supplied is 20,000 units.
Explain in detail how market forces would restore equilibrium once the regulation is removed.
A commentator writes: "Shortages happen because there isn't enough of the good. The only real fix is to produce more."
Discuss this statement, comparing and contrasting the roles of the demand side and the supply side in clearing a shortage. Refer to a supply and demand model in your answer.
Define consumer surplus and state where it is found on a supply and demand model.
In an illustrative market, demand meets the price axis at $60, supply meets the price axis at $20, equilibrium price is $40 and equilibrium quantity is 800 units.
Calculate consumer surplus and producer surplus, and explain in detail why total surplus is maximised at this equilibrium.
Two illustrative markets have the same equilibrium price ($30) and the same equilibrium quantity (1,000 units). In Market A, demand is steep (inelastic). In Market B, demand is shallow (elastic). Supply is identical in both.
Compare and contrast consumer surplus and producer surplus in the two markets, and discuss what this means for how the gains from the market are shared. Refer to a supply and demand model in your answer.
Explain what a deadweight loss shows about a market.
An illustrative market has equilibrium at Pe = $12 and Qe = 2,000 units. A maximum price of $8 is imposed, at which quantity supplied is only 1,200 units and the demand curve is at a height of $16.
Calculate the deadweight loss and explain in detail why the market is now allocatively inefficient.
"A subsidy makes consumers better off and producers better off, so it must improve allocative efficiency."
Discuss this statement. Compare and contrast the impact of a subsidy on consumers, producers and the government, and refer to a supply and demand model in your answer.
A 10% rise in the price of a good causes quantity demanded to fall by 25%.
Calculate the price elasticity of demand and state whether demand is elastic or inelastic.
An indirect tax of $3 per unit is placed on an illustrative good with inelastic demand.
Explain in detail why consumers bear most of the burden of this tax, and what this means for the size of the government's tax revenue.
A government wants to place an indirect tax on one good. It has two objectives: to generate revenue and to discourage consumption.
Explain whether the government should place the tax on an elastic or an inelastic good. Compare and contrast the impacts on consumers, producers and the government in each case, and refer to supply and demand models in your answer.