Only provide your opinions when specifically called for In a

Only provide your opinions when specifically called for. In all other cases your answer(s) should rely on the text and module materials, showing your capacity to apply the appropriate economic principles and concepts correctly.

1.Define consumer, producer, and social surplus and describe why competitive markets are considered to be the most efficient?

Solution

Consumer surplus is the area below demand curve and above market price. It is the difference between what consumers are willing to pay and what they actually pay.

Producer surplus is the area above supply curve and below market price. It is the difference between what producers get and what is the minimum price at which they are willing to sell.

Social surplus is the sum of consumer surplus and producer surplus.

Perfect competitive firms are efficient since P=MC, the social benefits are equal to social costs. The price that consumers are willing to pay equals the marginal cost of producing the units. This is allocative efficiency.

Perfect competitive firms also enjoy productive efficiency. The goods are produced and sold at the lowest possible average cost ( at the minimum point of LRAC).