Draw a demand and supply curve for a competitive product, making sure

Draw a demand and supply curve for a competitive product, making sure to clearly label the axis. Give a brief explanation for why the resulting equilibrium is economically efficient.

What will be an ideal response?

ANSWER

The level of output that maximizes the value of output to the economy is Q*. If Q is less than Q*, the value of the output to consumers is greater than the opportunity cost to suppliers, implying that suppliers could supply more units where that consumers value above their opportunity cost. If Q is greater than Q*, the opportunity cost of the suppliers is greater than demanders are willing to pay, implying an inefficient use of resources. Thus, the output level where the opportunity cost of suppliers is equal to the price that demanders are willing to pay is the economically efficient level since this implies that no resources are being used inefficiently.