Question

Discuss the concept of scarcity and explain why through a market economy allocative efficiency is typically achieved.

Answer 1

Scarcity concept states that human wants are always more than resources that are available to produce the goods used to satisfy those wants.

Allocative efficiency is where marginal utility is equals to marginal cost of production

In market economy allocative efficiency is achieved because price and quantity are controlled by demand and supply where demand and supply meets i.e, point of equilibrium price equals the marginal cost and allocative efficiency is achieved above the point of equilibrium supply is more than demand so consumers willng to pay less so that prices fall to sell goods below equilibrium level demand is more than supply when supply is less prices will increase till the level where demand equals supply so equilibrium i. e, allocative efficiency is typically achieved in market economy

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