Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Good Afternoon
I asked this question to your colleague but he didn't explain what his diagram means like what is E what is SS what is D and DD'.
Can you please either solve the question or explain what his diagram means.
Tell me what all the terms of the diagram mean.
Thank you
Transcribed Image Text:Question
Question : Plesse hellp awnsering the following question Thank you
1. Show on a single diagram, given a competitive market, an
increase in demand will provide the opportunity for rent
seeking activity
Expert Answer
Step 1
Competitive meriket ia the merket with large number of buyers and sellera, selling
homogeneous gooda and services.
Step 2
When the demand increases in competitive market, the equilibrium price and quantity
incresse
The shifting of equilibrium from E to E' ia due to rent-seeking behevior by the producers in the
market.
Rent-seeking behevior meana geining weelth/money without creating it. Economic egent can
take adventege of rent-seeking behevior when the market is not in equilibrium, by charginge
different price than the competitive price.
When the demand rises, there would be excess demend, ie the quentity demended exceed
quantity supplied. This gives the producer short-term mariket power to charge price greater
than the equilibrium price as the consumers are not getting the good easily in the market due
to shortage.
Overtime, all the producer cherge the higher price then the equilibrium price due to shortage
and earn economic rent or profita. This rent-seeking behaviorby the sellers will eventually
equete the new demand to supply. Thus, the economy will be again in equilibrium at which
the equilibrium price and quentity ia higher than initial equilibrium.
Price
DD'
Q'
Quantity
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