Question

Could you guys explain how supply and demand create efficiency ?

Answer 1

We know economy is at efficiency when the willingness to pay and the marginal cost of the last unit is the same.

In perfect competition, Marginal cost curve is the supply curve whereas willingness to pay is the demand curve. And in perfect competition, output is produced at a point where MR=MC or demand =supply or willingness to pay and marginal cost is same. Thus perfect competition output is efficient.

Howwever in case of imperfect competition, output is produced at a point where MR=MC but at this output demand and supply doesnot intersect that is willingness to pay is different from marginal cost. Thus there is inefficiency.