Consumers, Producers, and the Efficiency of Markets

When consumers go to grocery stores to buy their turkeys for Thanksgiving dinner they may be disappointed that the price of turkey as high as it is. At the same time when farmers bring to market the turkeys they have raised they wish the price of turkey were even higher. These views are not surprising. Buyers always want to pay less and sellers always want to get paid more. But is there a right price for turkey from the standpoint of society as a whole.

In previous , we saw how in market economies the forces of supply and demand determine the prices of goods and services and the quantities sold. So far however we have described the way markets allocate scarce resources without directly addressing the question of whether these market allocations are desirable. In other words our analysis has been positive rather than normative what should be. We Know that the price of turkey adjusts to ensure that the quantity of turkey supplied equals the quantity of turkey demanded. But at this equilibrium is the quantity of turkey produced and consumed too small too large or just right.

We take up the topic of welfare economics the study of how the allocation of resources affects economic wee-being. We begin by examining the benefits that buyers and sellers receive from taking in a market. We then examine how society can make these benefits as large as possible. This analysis leads to a profound conclusion. The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers.

One of the Ten Principles of Economics is that markets are usually a good way to organize economic activity. The study of welfare economics explains this principle more fully. It also answers our question about the right price of turkey. The price that balances the supply and demand for turkey consumers and turkey producers.

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