In a competitive market which is operating at equilibrium and is free from any government intervention, community surplus is and the society achieves .
Question
In a competitive market which is operating at equilibrium and is free from any government intervention, community surplus is and the society achieves .
Solution
In a competitive market operating under equilibrium conditions, community surplus (also known as total surplus) is maximized. Community surplus is the sum of consumer surplus and producer surplus, representing the overall benefits received by consumers and producers in the market.
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Consumer Surplus: This is the difference between what consumers are willing to pay for a good or service and what they actually pay. It represents the benefit to consumers from purchasing a product at a lower price than they are willing to pay.
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Producer Surplus: This is the difference between what producers are willing to accept for a good or service and the actual price they receive. It demonstrates the benefit to producers from selling at a higher price than the minimum they would accept.
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Maximizing Efficiency: In an ideal competitive market, the quantities produced and consumed are at a level where community surplus is maximized. This occurs where the price and quantity in the market are determined by the intersection of the demand and supply curves.
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Allocative Efficiency: The market achieves allocative efficiency when the price of the good reflects the marginal cost of producing it. At equilibrium, resources are allocated in such a way that consumer needs are met without waste.
Consequently, in a competitive market free from government intervention, community surplus is maximized, leading society to achieve allocative efficiency, optimal resource allocation, and overall welfare maximization. This outcome signifies that all potential gains from trade have been realized, benefitting both consumers and producers.
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