Skip to main content

🎓 New resources added daily! Join over 50,000 students using Padandas

Describe the market efficiency? How is market efficiency measured by consumer surplus and producer surplus?

Describe the market efficiency? How is market efficiency measured by consumer surplus and producer surplus?

(बजार कुशलताको वर्णन गर्नुहोस्। उपभोक्ता बचत र उत्पादक बचतबाट बजार कुशलताको मापन कसरी गरिन्छ ?)

Solution

Market efficiency means that the society’s resources are allocated and used in the best possible way. A market is efficient when the marginal benefit of consumption (MB) equals the marginal cost of production (MC), which happens at the competitive equilibrium of demand and supply.

The types of market efficiency are:

  1. Productive efficiency: output is produced at the minimum average cost (P = minimum AC), so nothing is wasted.
  2. Allocative efficiency: the price equals the marginal cost (P = MC), so resources go to the goods that society values most.

Market efficiency is measured using consumer surplus, producer surplus and total surplus:

  1. Consumer surplus (concept): consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. It was introduced by A.J. Dupuit and developed by Alfred Marshall, and it is based on diminishing marginal utility.
    Consumer surplus = total utility − total amount spent
    For example, if you are willing to pay Rs. 25,000 for a phone but buy it for Rs. 20,000, your consumer surplus is Rs. 5,000.
  2. Consumer surplus (on the graph): it is the area below the demand curve and above the equilibrium price line.
  3. Producer surplus (concept): producer surplus is the difference between the price a producer actually receives and the lowest price they were willing to accept.
    Producer surplus = actual sale price − willingness-to-sell price
    For example, if a firm was willing to sell at Rs. 1,000 but sells at Rs. 1,500, its producer surplus is Rs. 500.
  4. Producer surplus (on the graph): it is the area above the supply curve and below the equilibrium price line. Efficient producers earn more producer surplus.
  5. Total surplus: total surplus = consumer surplus + producer surplus. It measures the total benefit society gets from the market.
  6. Efficiency at equilibrium: total surplus is at its maximum at the competitive equilibrium, where demand equals supply and MB equals MC. At that point the market is efficient.
  7. Loss of efficiency: if output is below or above the equilibrium level, for example because of taxes or price controls, total surplus falls and a deadweight loss arises.

Explore more questions

  1. 1.

    Critically analyze the Loanable Fund Theory of interest.

    (ब्याजको ऋण योग्य कोषको सिद्धान्तको आलोचनात्मक विश्लेषण गर्नुहोस् ।)

    Asked in 2082 (15 marks)
  2. 2.

    How does a cartel determine the price to maximize the joint profit? Evaluate the advantages and disadvantages of cartel for consumers and producers.

    (संयुक्त नाफा अधिकतम गर्नका लागि कार्टेलले कसरी मूल्य निर्धारण गर्दछ ? उपभोक्ताहरू र उत्पादकहरूको लागि कार्टेलका फाइदाहरू र बेफाइदाहरू मूल्याङ्कन गर्नुहोस् ।)

    Long question Asked in 2082 (15 marks)
  3. 3.

    The production function of Langtang Cheese Pvt. Ltd. is \( Q = 4L + 11L^2 - L^3 \). Complete the following table.

    (लाङटाङ चिज प्रा.लि.को उत्पादन फलन \( Q = 4L + 11L^2 - L^3 \) छ । दिइएको तालिका पूरा गर्नुहोस् ।)

    No. of Labor Total Production Average Production Marginal Production
    0
    1
    2
    3
    4
    5
    6
    7
    8
    9

    a) Analyze the three stages of the Law of Variable proportion for Langtang Cheese Pvt. Ltd. by using above data.

    (माथिको तथ्याङ्क प्रयोग गरी लाङटाङ चिज प्रा.लि.का लागि परिवर्तनशील अनुपातको नियमका तीनवटा चरणहरुको विश्लेषण गर्नुहोस् ।)

    b) Market price of cheese is Rs.1000 per kg. and the wage rate is Rs 34,000 per month. Using data of the second stage of the Law of Variable proportion, find the equilibrium level of labour and output of the cheese.

    (चिजको बजार मूल्य प्रति केजी रु.१००० छ, र ज्याला दर प्रति महिना रु.३४००० छ । परिवर्तनशील अनुपातको नियमको दोस्रो चरणको तथ्याङ्क प्रयोगगरी, श्रम र चिजको उत्पादनको सन्तुलनस्तर पत्ता लगाउनुहोस् ।)

    Long question Asked in 2082 (15 marks)
  4. 4.

    Complete the following table. Graph total revenue, average revenue and marginal revenue curves. Explain the relation of total revenue and marginal revenue with price elasticity of demand.

    (दिइएको तालिका पूरा गर्नुहोस् । कुलआय, औसतआय र सिमान्त आय वक्रहरूको ग्राफ बनाउनुहोस् । मागको मूल्यलोचसँग कुल आय र सिमान्त आयको सम्बन्ध व्याख्या गर्नुहोस् ।)

    Quantity 0 10 20 30 40 50 60 70
    Total revenue 0 60 100 120 120 100 60 0
    Average revenue
    marginal revenue
    Long question Asked in 2082 (10 marks)
  5. 5.

    Why do some long run average cost curves are U-shaped but some are L-shaped? Differentiate with the reasons.

    (किनकुनै दीर्घकालिन औसत लागतवक्र U आकारका हुन्छन् तरकुनै दीर्घकालिनऔसत लागतबक्र L आकारका हुन्छन् ? कारणहरु सहित छुट्ट्याउनुहोस् ।)

    Asked in 2082 (10 marks)
  6. 6.

    Explain the consumer's equilibrium in cardinal approach. Price apple is Rs.20, price of banana is Rs. 10 and the consumer spends whole income Rs.110 on apple and banana. Find the consumer's equilibrium when the marginal utilities (MU) of apple and banana are as follows:

    (संख्यात्मक उपयोगिता विश्लेषण विधिमा उपभोक्ता सन्तुलनको व्याख्या गर्नुहोस् । स्याउको मूल्य रु.२० छ, केराको मूल्य रु. १० छ र उपभोक्ताले आफ्नो सबै आम्दानी रु.११० स्याउ र केरामा खर्च गर्दछ । स्याउ र केराको सिमान्त उपयोगिताहरु निम्नानुसार भएको अवस्थामा उपभोक्ताको सन्तुलन पत्ता लगाउनुहोस् ।)

    Units of consumption 1 2 3 4 5 6 7
    MU of apple 800 700 600 500 400 300 200
    MU of banana 500 450 400 350 300 250 200
    Long question Asked in 2082 (10 marks)