Lesson 21

Question 1

Equilibrium

Answer 1

When demand equals supply and the markets clear

Question 1

Draw market equilibrium graph (with excess demand and supply labelled)

Answer 1

N/A

Question 2

draw a positive externality graph for production + explain what is going on?

Answer 2

N/A for graph

Producers are prioritising PC over SC

so aren’t producing more because it is expensive

but more needs to be produced to reach allocative efficiency ( social optimum)

and as a result, price must decrease

e.g. when a firm invests in training their employees, they are indirectly helping other firms save on training as those firms can simply hire from that firm. if training becomes cheaper, more firms would do it, benefitting themselves and others.

Question 3

Draw a positive externality graph for consumption + explain what is going on?

Answer 3

N/A for graph

Consumers are prioritising their PB and so don’t realise there is more SB that can be had if they consume more

So price must be decreased to encourage them to consume more

e.g. someone is looking for private education to increase chances of getting into better schools. They are only looking out for their self interest, and do not realise the better private school they go to, the more qualified they become, the higher they are then taxed and then the higher the social benefit to society is.