Market Equilibrium Multiple Choice

Item18item18item 18a Market Equilibriummultiple Choice窗体顶端

Identify the correct statement about market equilibrium from the following options:

- It is socially optimal.

- It leaves unexploited opportunities for individuals.

- It might not maximize total economic surplus.

- It is never socially optimal.

Suppose we observe a decrease in the equilibrium price of tuna and an increase in the equilibrium quantity of tuna. This is best explained by:

• a decrease in the cost of fuel used by tuna fishing boats.
• a decrease in the tuna population in the oceans.
• a decrease in the expected future price of tuna.
• an increase in the price of salmon, a substitute for tuna.

If the supply curve and the demand curve both shift to the left, then the new equilibrium:

• quantity will be higher, but the direction of the price change is uncertain.
• price will be lower, but the direction of the change in quantity is uncertain.
• price will be higher, but the direction of the change in quantity is uncertain.
• quantity will be lower, but the direction of the price change is uncertain.

Paper For Above instruction

Market equilibrium serves as a fundamental concept in economics, representing a state where the quantity of goods supplied equals the quantity demanded at a specific price. Understanding whether market equilibrium aligns with social optimality, how fluctuations impact equilibrium, and what shifts in supply and demand signify are crucial for comprehending market dynamics and policy implications.

To evaluate whether market equilibrium is socially optimal, we consider its characteristics in the context of economic theory. Market equilibrium maximizes the total surplus—the sum of consumer and producer surplus—when the market is perfectly competitive, and externalities are absent. Under these conditions, equilibrium is aligned with social optimality, ensuring resources are allocated efficiently (Pigou, 1920). However, real-world markets often encounter externalities and information asymmetries, leading the equilibrium to deviate from social optimality. For example, pollution generated by production might render the market equilibrium suboptimal from a societal standpoint, necessitating government intervention to correct these misallocations (Coase, 1960).

The question of whether equilibrium leaves unexploited opportunities or maximizes total surplus highlights the distinction between efficiency and equity. Market equilibrium is efficient but not necessarily equitable, and sometimes opportunities for mutually beneficial trades remain unexploited due to market imperfections or barriers (Becker, 1971). In addition, external shocks or policy interventions can shift the equilibrium away from efficiency for various reasons, such as taxation or subsidies.

Considering the scenario of a decrease in the equilibrium price of tuna coupled with an increase in quantity, economic theory suggests several possible explanations. A significant factor could be a decrease in the cost of fuel used by tuna fishing boats, which reduces production costs and shifts supply outward. This shift results in a lower price and higher quantity in the market, as suppliers are willing to offer more at a lower price (Varian, 2014). Conversely, a decrease in the tuna population might cause a supply restriction, raising prices and lowering quantities, which contradicts the observed scenario.

Similarly, expectations regarding future prices influence current market behavior. A decrease in the expected future price could decrease current demand, lowering prices, but the associated increase in quantity suggests a different explanation, such as a supply increase rather than demand shifts. Lastly, substitution effects are relevant; if the price of salmon rises, consumers might demand more tuna, shifting demand outward, which would typically increase prices and quantities, not decrease prices. Therefore, the most plausible explanation for both a price decrease and quantity increase is a reduction in production costs, notably fuel costs (Mankiw, 2014).

When both supply and demand curves shift to the left, the outcome depends on the magnitude of these shifts. A leftward shift in demand indicates consumers are less willing or able to purchase as much at each price, decreasing both equilibrium price and quantity. A leftward shift in supply indicates producers are willing to supply less at each price, which tends to increase prices if demand stays the same. If both shift simultaneously to the left, the resulting effect on equilibrium price and quantity depends on their relative sizes.

If the demand decrease dominates, the price will fall, and the quantity will also fall, but the overall impact on price is clearer than the change in quantity. Conversely, if supply decline outweighs demand decline, prices tend to rise. When both shifts are of similar magnitude, the quantity will decrease, but the effect on price can be ambiguous—it could go up, down, or stay the same depending on the relative shifts. Typically, economic models predict that when both demand and supply decrease, the quantity decreases, but the price change remains uncertain without quantitative data (Mankiw, 2014).

In conclusion, the principles of market equilibrium provide vital insights into market functioning under various conditions. External factors such as costs, expectations, and substitutive goods significantly influence equilibrium adjustments. Recognizing the scenarios leading to shifts in supply and demand helps policymakers and economists formulate strategies to promote efficiency and address market failures.

References

• Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3(1), 1-44.
• Mark M. Becker. (1971). The Economics of Discrimination. University of Chicago Press.
• Mankiw, N. G. (2014). Principles of Economics. 7th Edition. Cengage Learning.
• Pigou, A. C. (1920). Copmlete Economic Theory. London: Macmillan.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. 9th Edition. W.W. Norton & Company.