Mankiw's Principles of Microeconomics Chapter 7

1.  Describe efficiency from the perspective of an economist?

It is by human nature that we strive to be the most efficient at what we do at all times. In some ways markets perform the same job; however, in an ideal world the principles of economics drive the results to equilibrium not so much the actions of an individual or organization. Efficiency can only be achieved if the market is free of externalities that cause market failure. Improper regulation in the marketplace can cause an inefficient allocation of resources. A good example of what lead to a market failure would be the market for mortgage backed securities prior to the housing collapse.  

2.  What was the most difficult concept in this chapter for you?  Why?

The section on Evaluating Market Equilibrium was rather confusing for me. Figure 8 in particular was difficult to grasp. I get the general concept that the supply of goods will be sold to the buyer that values them the most, and the seller’s who’s cost of goods is the lowest will have a higher producer surplus; however, I don’t understand point 3, “free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus. In my interpretation, I see the “social planner” in this example as Hugo Chavez. His economic policies regarding the supply of inelastic products would be an externality trying to influence the market in an effort to raise the economic well-being of his society.