Principles of Economics- Mankiw (5th) 136

Principles of Economics- Mankiw (5th) 136 - 142 PA R T T H...

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142 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE 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? In this chapter we take up the topic of welfare economics, the study of how the allocation of resources affects economic well-being. We begin by examining the benefits that buyers and sellers receive from taking part in a market. We then ex- amine 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. As you may recall from Chapter 1, one of the Ten Principles of Economics is that markets are usually a good way to organize economic activity. The study of wel- fare economics explains this principle more fully. It also answers our question
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