10 POINTS – Economics – supply/demand/efficiency/dead weight loss question?

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Question by Acidblonde: 10 POINTS – Economics – supply/demand/efficiency/dead weight loss question?
First off, this is homework. It is due. I am frustrated.
I am not asking anyone to do my homework, but the prof was unable to adequately explain this to me and I am frustrated. I have read the question over so many times it has lost meaning.

So anyone that knows, I’d like help/an explanation/ a hint, something.
I am not asking for someone to ‘do my homework’ for me.
Just wanted to clarify.

The question is supposedly true/false & relates to a simple supply and demand graph (which I can’t draw here but will describe).
The graph is set up where the supply curve = MC; and the demand = MB, and the question goes:

“…suppose the government produced extra macaroni on its own less than MC, such that it created an artificially low price P” [see graph]. There is no dead weight loss here – only additional efficiency, given that Q”>Q* [quantity supplied is greater than equilibrium quantity]. In other words, the more of a good produced, the higher the efficiency.”

Not I can pick out a few false things – like the law of diminishing returns means the more you produce the lower the efficiency.
I do not understand how the govt’ producing more of a good would affect supply and demand. The graph he has drawn I think is supposed to be false as well, but I don’t know…

On the graph he gives, the new price P” is below equilibrium price and hits the supply and demand curves to the right of the equilibrium point – giving the impression that said government has created a lot of supply and low demand.

I am also not sure about the deadweight loss/excess burden…

Really confused. Anybody who can help me, even in part, even speculation (economically related of course), I appreciate. Thanks~
Thanks for the input Doc – I will have a look at those links.

However, I’m also a believer in Keynesian economics. I remain firm in my belief that the free market cannot and will not properly allocate resources (left entirely to its own devices). I am guessing that is what these links pertain to?

It doesn’t help much with my homework right now either, unfortunately. Can’t say I’m exactly surprised that all the fine economic minds in this country aren’t on YA in the wee hours of Thursday morn, hehe…

I respect your point of view though.
Thanks so much Warren – that was helpful.

The thing that was confusing me (besides the dead weight loss) was the graph, and while replying to your question I actually got an epiphany & understood what I was looking at for the first time, so yay me.

And I can now see the dead weight loss area so that was really helpful, thanks for the clarification.

I may get some sleep tonight yet~ 😀

Best answer:

Answer by Doc
I’m going to give you a link that, if you read and, will change your life.
But it probably won’t help you in school.
That’s because there are basically two “schools” of economic thought: The Austrian or Chicago school and the Keynesian, which your teacher believes in.

I can’t help you with your specific questions because I believe it’s all a bunch of hooey. I am not alone, but we are not in the majority.

First some background:
http://jim.com/rights.html
More background, not as long:
http://jim.com/bastiat.htm

Some seriously meaty and easily understood economics:
http://jim.com/seen.htm

Economics in One Lesson (your teacher will hate this!)
http://jim.com/econ/chap01p1.html

You can read more on this site: http://jim.com/

The questions you ask above is why most American’s give up on understanding economics. Those who are “in charge” of the official economy (as opposed to the one we enjoy) have good reasons to keep as many potentially interested people out of the profession as possible (10+ trillion reasons and counting!)

Like I said, likely these links won’t help you in your current class assignment. And your teacher will likely flunk you if you bring up these things in his class, but if you’re game to actually learn about how money works and what makes up an economy, bookmark those links for later absorption.

Know better? Leave your own answer in the comments!


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One Response to “10 POINTS – Economics – supply/demand/efficiency/dead weight loss question?”

  1. WarrenBB writes:

    The short answer is False. There is a deadweight loss anytime you have people who are buying things who normally wouldn’t have bought it, or you have people not being able to buy it when under normal circumstances, would have bought it.

    This case looks like a subsidy, the end result being that the price of the good dropped to a lower price point P” and at a higher Quantity Q”. I can’t tell you what the area is that is associated with the dead loss since I don’t quite see your graph, but I can tell you at least in general terms, that due to the subsidy, you have additional folks buying when P dropped who normally would not have. This is considered deadweight loss.

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