Classical economics entails a relatively static model of the interactions among supply, demand, and prices. The supply and demand curves designate the dependency of supply and demand on price. However, it does not provide adequate information on how equilibrium is reached and the duration was taken. Equilibrium is a state where market supply and demand balances each other and as a result, price becomes stable. In evaluating the market equilibrium, precisely for pricing and volume determinations, a comprehensive understanding of demand and supply inputs is critical to economics. For example in the real economy, market prices are affected by the inventory of goods detained by the manufacturers rather than the ratio at which they are supplying goods.
Supply and demand, therefore, is the most fundamental concept of economy and acts as the backbone of any market. Consumers and producers react differently to any price change. Companies will increase their supply to the market when prices are high, but consumers will end up buying less. Nevertheless, when prices are low demand goes high and manufacturers tends to hold more goods until prices rise again. However, in a free market, there is always that single price which brings supply and demand into balance, and that is referred to as equilibrium price. Under this situation, there is success rewards motivation to individual innovation and notion, hard work and ingenuity (Mankiw, 2015). It is the reason why consistent businesses will make outstanding profits in a field full of competitors. Competition is promoted, which is a significant component of the free market system.
Somebody may ask by achieving equilibrium how will the typical consumer benefit? For any business to thrive in such a market, they must produce quality products and offer outstanding services. Also, they are given the power of choice from a variety of product at a reasonable price. Consumers are the primary determiners of who the winners and losers are based on their demands. Therefore, businesses will ensure they meet their needs accordingly, otherwise the business losses. Lastly, this form of equilibrium will encourage mushrooming of more businesses in the economy as a monopoly is discouraged (Arnold, 2014). To have a growing economy governments should ensure there is a free market in the countrys economy.
Explain efficiency of market using the consumer and producer surplus concept
Efficiency broadly means making the best credible use of resources. Economic efficiency is precisely known as the allocative efficiency, which refers to producing the combination of goods mostly wanted by the society. Allocative efficiency, on the other hand, is achieved when the economy allocates resources such that no one is better off regarding increasing their benefits from consumption without someone else becoming worse off. Therefore, the benefit from consumption is maximized for the good of the entire society (Mankiw, 2014). The consumer and producer surplus acts as the core tools used by economists to study the well-being of sellers and buyers in the market. Consumer surplus is the benefits buyers receives from participating in the market while producer surplus is the benefit to the merchants. To attain active market buyers and sellers must be led by an invisible hand to a steadiness that maximizes the overall benefits to buyers and sellers regardless of their welfare.
However, they are some activities in the market hindering market efficiency. It is evident that markets are perfectly competitive but at times competition may go far from perfect. For example, a single buyer or seller may control market prices due to his or her market power keeping the prices and the quantities away from the levels determined by the equilibrium of supply and demand. Also, at times, some decisions affect non-participants of the market and this need to be addressed accordingly. Pollution is one of the effects facing third parties. Therefore, market power and externalities among other factors cause market failure. Hence, government intervention and policies aimed at preventing involved parties are necessary. Also, they help in attaining an efficient market.
Explain cost of taxation using consumer and producer surplus concept
Taxes for a long time are often a source heated political debate. Taxation affects prices, and quantity of goods sold, and its effect must be divided between buyers and sellers. It may seem evident that the government enacts taxes to raise revenue. However, buyers and sellers are worse off when goods are taxed. However to understand how taxes affects economic well-being there is need to focus on the reduced welfare of sellers and buyers to the amount of revenue raised by the government. For a successful comparison of this effect, it is necessary to evaluate the consumer and producer surplus. It is evident that due to taxation change in total welfare includes a shift in consumer surplus and change in producer surplus. In both cases the effect is negative, but when it comes to change in tax revenue, the result is affirmative. Therefore, the losses to buyers and sellers from a tax exceed the revenue raised by the government. The fall in total surplus arising from a market distortion as a result of tax is what is commonly known as deadweight loss. In understanding the economic impact of the taxes, it is paramount to analyze the price elasticity of supply and demand, which indicates some goods supplied and that demanded and its effects on prices.
Explain the benefit of international trade using the consumer and producer surplus concept
A country applies more than one approaches to achieve free trade. The unilateral approach is one of them whereby it removes trade restriction on its own. The other option is adapting the multilateral approach and reduce trade restriction with other countries apply the same. Free trade means that countries can export and import goods without any tariff barriers or even on- tax obstacles to trade. Among the advantages of free trade are: it promote comparative advantage where countries specialize in the production of goods with lower opportunity cost. Second reducing tariff barriers lead to trade creation. Therefore, consumers switch from high-cost to low-cost producers. Third it promotes economies of scales as countries specialize in the production of products at a lower average cost. Fourth there is increased competition and hence more incentives to cut costs and improve efficiency. Lastly, world trade is one of the engines of economic growth, and there is a need to encourage it at all cost (Mankiw, 2014).
How externalities may affect market equilibrium and how government policy may remedy effects of these externalities.
The Externalities are the effects that cause the costs or benefits to either of the parties involved in a given transaction of which they are aware of or subjected. The expectation of a market equilibrium requires the existence of a balance between the benefits and cost within the trade lines between the producer and consumer, hence the community as a whole. The externalities differ regarding the resultants effects incurred by the buyer or the third party who may include an organization or a property owner. For instance, negative externality causes negative impacts that drive to a costlier effect compared to the benefit of production of a given product. A positive externality imposes a positive influence to either of the parties involved in the transaction, thereby, creating an imbalance in costs and benefits in the market. Some of the externalities that affect the market equilibrium is pollution (Mankiw, 2014).
An example of a negative externality is environmental pollution from producers. Most of the industries tend to manufacture with an aim of satisfying customer or consumers needs. However, they do not bear a consideration of taking care of balancing the benefit to customers as well as public or social cost. Despite the production of a commodity for the consumer, the manufacturing process may render the users, hence the whole community into an environment containing hazardous health condition. The pollution cost is substantial, and it will eventually be incurred by the public as whole, such as medical expenses, despite the existence of the produced goods. Therefore, this indicates there is an imbalance between the social or public benefits and the costs incurred upon the good produced. There also exist other negative externalities especially the ones based upon decisions that may lead others to incur costs.
However, there are positive externalities that result in positive aspects to the consumer and society as a whole such as education. Educated persons bring a lot of benefits to the community despite incurring costs for their learning. For example, stable society, reduced criminal activities, knowledgeable personnel, and escalated government tax collection. That collectively brings benefits to the society indirectly since these advantages are not accounted for by the consumer when considering the positive consequences of education. However, if there would be no educated society, a lot of costs may be incurred to bring down the societal instabilities brought by illiteracy.
All in all, producers do not get responsible of external costs when negative externalities exist. That makes them have a lower cost than the prospected value. Meanwhile, the cost incurred by the society overwhelms compared to the benefits from the products, hence, market inefficiencies. Due to that, the policy maker needs to get involved to the system. Imposing substantial penalties and eliminate the producers resulting into the negative externalities while promoting and embracing the positive externality-oriented producers. The promotion may include offering assistance through government subsidy. Furthermore, the government endorses and brings explicitly designed plans to ensure sustenance and protection of resources while ensuring benefits are still enjoyed. Therefore, the policymakers play a significant role in the adjustment of costs and benefits to make both reach an optimal level.
The difference between efficiency and equity of a tax system regarding costs imposed on taxpayers using the benefit principles.
All the workers and investors in every nation get subjected to tax payments. However, the taxpayers do not seem to admit efficiently and comply with the tax codes and ethics. Consequently, tax efficiency is aimed at reducing the costs incurred by compliance of tax laws through reduction of authoritative hindrances (Alm, 2006). Therefore, the tax efficiency aims at encouraging the payment of taxes through simplifying the tax codes through various ways which not only benefit the taxpayers but also boost the economy. For instance; subsidized taxes, reduce negative impacts of taxes on the economy, and reduce deadweight losses.
The complexity of the codes and ethics regarding taxing creates significant changes to the taxpayers to take advantage of how taxing laws stipulates. For instance, within the tax system, there exist sections that aim at special treatment for a particular class of wealthy. The wealthy citizens much embrace the code of costless or much less charging on the transfer of their wealth under little taxing. Reduction of the deadweight losses can save much also by making sure the correct structure on taxes regarding working income is solved.
Another policy regarding the tax efficiency is to reduce the effects of the tax on the economy field. For instance, escalation of taxes on the level of income may discourage the workers from engaging the duty since their salary is much reduced by the heavy taxes, while raising the price of labor to the employers. That significantly reduce...
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