PERFECT COMPETITION:a)Is the invisible hand likely to work better in a market with price controls o

a) In a perfectly competitive market, market prices align self-interest and social interest. Market prices act as the most important piece of information, leading the right buyers to buy and the right sellers to sell. Prices also allow entrepreneurs to allocate the production of goods within the same industry and also across industries. Hence, it is the market price that guides the invisible hand. When prices are allowed to move freely, social surplus is maximized in a perfectly competitive market. For example, if the demand for a commodity increases in the market of a particular region, prices go up, which encourages new firms to enter the market. But if some ruling authority does not allow the price to change according to the market conditions, and fixes it, the invisible hand will cease to operate. Price controls are such non-market price impositions, and they limit the functioning of the invisible hand.

b) The equilibrium price in the figure is $30, as given by the point of intersection between the demand and the supply curves. If the price is fixed at $40, quantity supplied is 60 units, whereas quantity demanded is 10 units. Hence, there is a surplus of 50 units in the market. On the other hand, if the price is fixed at $20, quantity demanded is 60 units, and quantity supplied is 20 units. There will be a shortage of 40 units in the market.