Author Question: What are the obstacles to achieving an efficient allocation of resources in the market economy? ... (Read 126 times)

melina_rosy · **on:** Jun 29, 2018

What are the obstacles to achieving an efficient allocation of resources in the market economy?

What will be an ideal response?

Question 2

Define price elasticity of demand. What does it measure?

What will be an ideal response?

tjayeee · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Markets with price or quantity regulations, taxes or subsidies, externalities, public goods or common resources, monopoly power, or high transactions costs will not produce the efficient quantity of a good or service. In each of these situations, the market prices charged or quantities produced and sold will not result in the efficient allocation of resources. Efficiency requires that the marginal social benefit of the last unit produced be equal to the marginal social cost. The equilibrium at the intersection of the demand and supply curves in the competitive market creates this result. When the market price or quantity is pulled away from the market equilibrium, the marginal social benefit of the last unit produced does not equal its marginal social cost.

Answer to Question 2

Price elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price. It measures the responsiveness of quantity demanded to changes in price.