Problem
Circular Flow Diagram and Labor Market:
I. What is the relationship between total surplus and economic efficiency?
II. Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. (Hint: no graphical illustration is required although you can discuss the demand and supply curves in your prediction).
i. Cars are becoming more fuel efficient and therefore get more miles to the gallon.
ii. The winter is exceptionally cold.
iii. A major discovery of new oil is made off the coast of Norway.
III. It is clear that productive inefficiency is a waste since resources are being used in a way that produces fewer goods and services than a nation is capable of. Why is allocative inefficiency is also wasteful?