IB Economics Topic 2.3.6 Allocative Efficiency at the Competitive Market Equilibrium Revision Notes (SL/HL)

IB Economics Topic 2.3.6 Allocative Efficiency at the Competitive Market Equilibrium Revision Notes (SL/HL) | RevisionDojo

Written by official IB examiners

Societal/community surplus maximised at equilibrium

Definition

Social surplus

The sum of consumer surplus and producer surplus. Maximised in the free market, when the market operates at its equilibrium point.

Figure 1a above illustrates how the social (or community surplus) is maximized when the market operates at equilibrium. This is because:

The consumer and producer surplus are maximised at $P_e$, $Q_e$.
This is evidenced by the fact that area of the social surplus at equilibrium is the largest it can be (at that $P_e$ and $Q_e$).

Consider now the market price is $P_1$ instead of $P_e$ (Figure 1b):

At this point, producers are only wiling and able to supply a quantity $Q_1$.
Therefore, all the quantities from $Q_1$ to $Q_e$, which would have been produced if the market was operating at equilibrium ($P_e$, $Q_e$), are now not being produced.
Hence, society is losing out on the social surplus from $Q_1$ to $Q_e$ that it would have benefited from if the market produced at $Q_e$.
Resultantly, the area of the social surplus is now smaller than the social surplus when the market operates at equilibrium.
This shows how social surplus is maximised when the market operates at equilibrium.

The loss in the social surplus in Figure 1b is referred to as the welfare loss.

Definition

Welfare loss

The reduction in social surplus that occurs when marginal social benefits (MSB) are not equal to marginal social costs (MSC), typically as a result of market failure.

The welfare loss can be understood as the loss of societal benefit for not operating at the equilibrium price.
Since equilibrium ensures allocative efficiency, social surplus is maximized and no welfare loss exists at that point..

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Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

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Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Duis aute irure dolor in reprehenderit

Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum.

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt. Neque porro quisquam est, qui dolorem ipsum quia dolor sit amet, consectetur, adipisci velit.

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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Societal/community surplus maximised at equilibrium

Definition

Social surplus

The sum of consumer surplus and producer surplus. Maximised in the free market, when the market operates at its equilibrium point.

Figure 1a above illustrates how the social (or community surplus) is maximized when the market operates at equilibrium. This is because:

The consumer and producer surplus are maximised at $P_e$, $Q_e$.
This is evidenced by the fact that area of the social surplus at equilibrium is the largest it can be (at that $P_e$ and $Q_e$).

Consider now the market price is $P_1$ instead of $P_e$ (Figure 1b):

At this point, producers are only wiling and able to supply a quantity $Q_1$.
Therefore, all the quantities from $Q_1$ to $Q_e$, which would have been produced if the market was operating at equilibrium ($P_e$, $Q_e$), are now not being produced.
Hence, society is losing out on the social surplus from $Q_1$ to $Q_e$ that it would have benefited from if the market produced at $Q_e$.
Resultantly, the area of the social surplus is now smaller than the social surplus when the market operates at equilibrium.
This shows how social surplus is maximised when the market operates at equilibrium.

The loss in the social surplus in Figure 1b is referred to as the welfare loss.

Definition

Welfare loss

The reduction in social surplus that occurs when marginal social benefits (MSB) are not equal to marginal social costs (MSC), typically as a result of market failure.

The welfare loss can be understood as the loss of societal benefit for not operating at the equilibrium price.
Since equilibrium ensures allocative efficiency, social surplus is maximized and no welfare loss exists at that point..

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.3.6 Allocative Efficiency at the Competitive Market Equilibrium Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Societal/community surplus maximised at equilibrium

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

Societal/community surplus maximised at equilibrium

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account