# data[].attributes.body
When market is inefficient, social welfare is reduced and not maximized. Assume that there is government intervention in the market for bottled mineral water in the form price control. Suppose that government sets the price of mineral water bottle at RM6.50 per bottle. This will cause the market supply to sell where market demand is. In figure 3.6, at RM6.50, market demand, Qdm = 500. This leads to a change in CS and PS amount from the previous amount.

Based on the diagram, the new CS and PS can be calculated as:

CS = (11.50 - 6.50) x 500 x 1/2 = RM1250.

In order to calculate PS, first, price of product when Qsm = 500 needs to be determined. From table 3.2,

Qsm = -100 + 400P:
Qsm = -100 + 400P
500 = -100 + 400P
P = 1.50 at Qsm=500
PS = [(6.50 - 1.50) x 500] + [(1.50 - 0.25) x 500 x 1/2 = 2500 + 312.5 = RM2812.50

Previously,
CS = RM4050. CS has now decreased to RM1250.
PS = RM1012.50. PS has now increased RM2812.50.

In the economy, there is an overall change in society's welfare. This is measured as the sum of the changes in CS and PS. Change in society's welfare is thus:

CS = 1250 - 4050 = - RM2800
PS = 2812.50 - 1012.50 = RM1800
Total change in social welfare = - 2800 + 1800 = - RM1000

This amount shows that society's welfare has decreased. This is the result of shifting from an efficient market condition to one that is inefficient. An inefficient market (market failure) can be caused by many factors, such as imperfect market, externalities, public goods provision and government intervention in the market. For this analysis, it is government intervention that has caused price to change causing inefficient market situation.

An inefficient market results in deadweight loss (DWL), which refers to the net loss to consumers and producers as a whole due to an allocatively inefficient market. The value of DWL in this analysis is RM1000, which is the total change in social welfare. Note that while consumers have experienced net loss, firms have enjoyed net gain. Overall, there is a net loss in society of RM1000.

# data[].attributes.body
In figure 3.5, buyers' willingness to pay is the area below market demand. While sellers' willingness to accept payment is the area below market supply. Price paid in the market is RM2.50. Consumer surplus (CS) and producer surplus (PS) are thus calculated as follows:

CS = (11.50 - 2.50) x 900 x 1/2 = RM4050.

PS = (2.50 - 0.25) x 900 x 1/2 = RM1012.50

Social welfare = CS + PS = RM5062.50

Efficient market results in attaining maximum social welfare. Total welfare in the society based on the efficient market condition is valued at RM5062.50. It is not possible to gain any improvement from this condition. A change from this efficient condition will likely to reduce social wefare.

# data[].attributes.body
In a market, society's welfare is measured by benefits to consumers and producers in the form of consumer and producer surplus. Consumer surplus (CS) is the net benefit held by buyers, measured as the excess of their willingness to pay over what they acually pay (or the market price), aggregated over all units purchased. Producer surplus (PS) is the net gain enjoyed by sellers, measured as the excess of market price over marginal cost (MC) or what sellers are willing to receive for each output, aggregated over all units sold. Using the previous market example, consumer and producer surplus are shown in figure 3.5. Given that this is a perfectly competitive model and the market has attained efficiency (MB = MC), social welfare (the areas representing CS and PS) is maximized. Resource allocation is thus efficient, as it is not possible to reallocate resources to improve social welfare.

# data[].attributes.body
Is the market model efficient at firm's level? For a firm, profit maximization requires that marginal revenue (MR) equals its marginal cost (MC). If firm is a perfectly competitive firm: When MR = MC, price or P = MC. P can represent the MB of production as P reflects the value society holds for the good. Thus, when P = MC, it means that MB = MC. This (as shown in figure 3.4) is efficient.

# data[].attributes.body
Any amount of output less than 900 indicates underallocation of resource. For example, producing at Q=700 will mean MB > MC, indicating that value of the good is higher than resource allocated. More of the good should be produced.

Any amount more than 900 indicates overallocation of resource. For instance, producing at Q = 1100 will show MC > MB., indicating that the cost allocated to producing the good is much higher than the value placed by society on the good. Thus, less amount of the good should be produced.

The allocatively efficient output level is 900, where where MB of producing the good (bottled mineral water) is equal to MC of resource allocation for the good.

Market demand is a measure of marginal benefit (MB) or the value people place on the good. Market supply is a measure of marginal cost (MC). For a perfectly competitive market, the sum of all firms' marginal cost represents market supply. Since market demand is equal to market supply at equilibrium, marginal benefit (MB) is also equal to marginal cost (MC).

As Qdm = Qsm, MB = MC. This is efficient, as the additional value that society places on the good (represented by MB) is equal to what the society must give up in resources to produce it (represented by MC).

# data[].attributes.body
Allocative efficiency can be analyzed at the market and firm levels. At the market level, allocation of resources is efficient, provided that the firm is operating in a perfectly competitive market. In perfect competition where goods are homogeneous and there are many sellers, each firm has no control over price. Price is set by the interaction of all sellers and all buyers in the market. This is similar to the market model shown in figure 3.2. In order to extend the discussion, the figure is shown again as figure 3.3.

# data[].attributes.body
Technical efficiency or productive efficiency deals with economizing on resources used in production. It involves production decisions that generate maximum output, given some stock of resources. Based on the materials balance model, in order to be efficient, firms should use natural resources sparingly and minimize the production of residuals. The perfectly competitive firm is technically efficient, as they cannot increase price to cover added expenses for inefficient production.

# data[].attributes.body
Allocative efficiency is about the proper allocation of resources among alternative uses. Allocative efficiency requires that resources be appropriated such that the marginal benefit (MB) of producing a good is equal to the marginal cost (MC) of allocating resource to produce the good.

# data[].attributes.body
Is the market for private goods efficient in using resources? There are 2 types of efficiency that is of concern.

# data[].attributes.body
Qdm = 1150 - 100P.
100P = 1150 - Qdm

Thus, the inverse demand is: P=11.50 - 0.01Qdm. The intercept value for P axis is 11.50

Qsm = -100 + 400P
400P = 100 + Qsm

Thus, the inverse supply is: P = 0.25 + 0.0025Qsm. The intercept value for P-axis is 0.25.

The market supply and demand curves are illustrated in figure 3.2.

# data[].attributes.body
A shortage will give a market signal that price is too low, while a surplus will give a signal that price is too high. The market will reach an equilibrium (a state of balance) when market supply is equal to market demand, eliminating any shortage or surplus. At equilibrium, the marketclearing price is obtained as follows:

Qsm = Qdm
-100 + 400P = 1150 - 100P
500P = 1250
Equilibrium price, Pe = RM2.50
Using Qsm or Qdm, equilibrium quantity, Qe = 900 bottles.

Using market supply and demand functions in table 3.2, market demand and supply curves can be illustrated in diagram form. In order to clearly illustrate both curves, market demand and  supply functions need to be transformed into their inverse or price functions

# data[].attributes.body
Given market demand and supply curves for a good, the market works by adjusting to shortages or surpluses that occur at certain market prices. For instance, assume that for another example of bottled mineral water, market demand, Qdm = 1150 - 100P while market supply, Qsm = -100 + 400P. Table 3.2 below shows market conditions at various prices.

# data[].attributes.body
Supply is the quantity of a good producers are willing and able to sell in a time period, given prices, and assuming ceteris paribus. Based on the law of supply, given all else constant incuding costs, as price increases, quantity supplied rises too as it is more profitable for sellers to do so. The supply curve for a good is an upsloping curve. Market supply is the combination of the amount of a good that all sellers are willing to sell. This is obtained by horizontally summing individual supply at the same prices.

# data[].attributes.body
For private goods, such as the bottled mineral water that is supplied and demanded in the market, market demand is graphically obtained by summing up individual demand horizontally (or at the same prices). This is shown in figure 3.1.

# data[].attributes.body
Market demand is the total amount in the market that all consumers are willing to pay for the good, given prices. For instance, for the demand of a bottled mineral water, demand are as follows: Qd individual 1 = 23 - 2P Qd individual 2 = 46 - 4P Thus, market demand is Qdm = Qd1 + Qd2 = 69 - 6P. In obtaining market demand for bottled mineral water, all individual demands are added horizontally at the same prices. Given 2 levels of prices, RM.50 and RM3.50, individual and market demand are as calculated and shown in Table 3.1.

# data[].attributes.body
Demand refers to the quantity of a good consumers are willing and able to purchase in a certain period, given prices, assuming ceteris paribus. Willingness to buy or pay (WTP) for a good is the value that a consumer holds for the good or the benefit the buyer is expecting from purchasing the good. The WTP, which is also the price consumer pays for the product is also the marginal benefit (MB) associated with consuming the good. Based on law of demand, price and quantity demanded are inversely related, given ceteris paribus. The demand curve for a good is thus downward sloping.

# data[].attributes.body
Market is where there is interaction between consumers and producers to exchange a private good or service. A private good is a good with the characteristics of rivalry in consumption and excludability. Rivalry in consumption means that the consumption by a person precludes (excludes) that of another. For instance, when a computer is purchased by a person, that computer is no longer available for purchase by another person. Excludability means that the benefits of consumption of a good are exclusive to a single buyer. In most cases, a purchased good will benefit its buyer and not other people.