Explain why the forces of supply and demand fail to provide an efficient use of resources

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  • Created by: Matt Lowe
  • Created on: 09-04-13 12:59
Preview of Explain why the forces of supply and demand fail to provide an efficient use of resources

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Supply and demand are the amount available and the amount wanted respectively.
And the typical trend is the higher the price of the good, the more supplied; the
lower the price, the more demanded. The most efficient point is where supply equals
demand. Here, the right amounts of goods are produced for the demand required;
has been
This way,
can be
achieved in
order not
to waste
However, excess supply can result in allocative efficiency: where a company only
produces what a consumer desires. It occurs when a price is set too high and
consumers aren't willing to purchase the good/service. Unfortunately this creates a
surplus. Here, resources such as land, labour, capital and enterprise aren't being
utilised effectively. This also works with demand if prices are set too low and too
many consumers want to purchase the good/service. To solve this issue, suppliers
will push the prices up to align the demand with the supply to create a new
equilibrium. If there is a low supply and a high demand, the supply goes to those that
are willing to pay the most.
Increases in either of these two could result in the demand and supply curves shifting
inwards if the change is negative or outwards if the change is positive. And form of
equilibrium has the greatest level of efficiency where all resources are effectively
utilised: benefits need to be greater than costs for it to be viable.


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