Demand price exceeds supply price c

Demand price exceeds supply price contributes positively to society total surplus. As you can see from the figure, production and consumption of all units between 0 and 800 must be undertaken to maximize social surplus . For consumption and production levels greater than competitive equilibrium beyond point A in the figure social surplus will be smaller than at point A consider the 1000th unit for which demand price $40 is less than supply price $70 As we have previously explained production and consumption of this unit are in efficient because $70 worth of scarce resources in transformed through production into a good worth only $40 Obviously this would be wasteful for society. Fortunately there is no price for this good that would stimulate buyers and sellers voluntarily to make such a wasteful transaction . Therefore competitive market forceslead to the exact level of consumption and production that maximizes social surplus and hence maximizes the value of this free market to society
We must emphasize that while competition maximizes social surplus this does not imply that either consumer or producer surplus is maximized individually it is the sum of the two that is maximized Moving away from competitive equilibrium point A can result in one kind of surplus rising while the other surplus fall but it must always reduce total social surplus We can now summarize the results of this section in a principle
Principle markets in perfectly competitive equilibrium achieve social economic efficiency because at the intersection of demand and supply curves conditions for both productive efficiency and allocate efficiency are met At the competitive market clearing price buyers and sellers engage in voluntarily exchange that maximizes social surplus
Market failure and the case for government intervention competitive market can do a number of desirable things for society Under perfect competition producers supply the right amount of good and services charge the right price and the right consumers get the goods produced the right amount to produce is the allocatively efficient amount all unit of output are produced for which consumers value those units by more than society value the resources required to produce than No unit are produced that cost more to supply than they are worth to buyers Competitive suppliers cannot control the price of the product because thee are many producers and the products they sell are virtually identical Consequently prices in competitive market are determined by the impersonal forces of market demand and supply in the long run consumers viable since market force drive prices down to minimum long run average cost even in the shot run however market prices are determined by the cost structure of firms that operate on their short run expansion paths so cost are minimized given the fixed amount of productive capacity in the short run Finally voluntary exchange at the market determined price insures that industry output is purchased by the consumers who place the highest value on consuming the goods and services