1. Identify three reasons why the supply of oranges, for example, might increase and explain how this change will result in a new equilibrium.
3 Reasons why the supply of oranges might increase
– Production technology for oranges advance. For instance if an certain technology advances and helps reduce the production cost of oranges, the producer will be able to produce more, thus causing the supply of oranges to increase.
– Decrease in prices of substitute goods. For example lets say that the price of tangerines decrease. Due to the decrease in price, suppliers would invest more on the production of oranges as they don’t want to lose profit. There for the supply of oranges will increase.
– Increase in suppliers. For example Japan decides to give subsidies to those who contribute in agricultural farming. This would motivate people to start farming, which some of might be interested in producing oranges. Since there would be more suppliers, the supply of oranges will increase.
New equilibrium when supply increases
As the supply of oranges increase, the supply curve will shift to the right (demonstrated with S2). This will cause the equilibrium price to drop.
2. Describe the concept of allocative efficiency and explain why it is achieved at the competitive market equilibrium.
Allocative efficiency is achieved when society is getting the goods and services they want the most. In other words, it is when marginal benefit is equal to marginal cost.
Marginal cost is the cost it takes to produce one additional product.
Marginal benefit is the utility we obtain from consuming one additional quantity of the good or service. Marginal benefit tends to decrease as consumption increases
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