3 PPT_Efficiency

3 PPT_Efficiency - produce it. The high cost firms with...

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Efficiency and Competitive Market Equilibrium
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What do economists mean by “efficiency”
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Pareto Efficiency (aka Pareto Optimality) We say that an allocation of goods across individuals is Pareto Optimal if there is no alternative allocation that leaves everyone at least as well off and makes some people strictly better off.
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The equilibrium in a competitive market is efficient (Pareto Optimal) P Q S D
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The competitive equilibrium also guarantees the efficient allocation of quantities across consumers and firms •O n l y consumers for whom the value of the good is above the price will buy the good. Those individuals for whom the value of the good is below the price will choose not to buy the good. From a social perspective, this outcome is optimal. • On the supply side , only those firms who can produce the good for a marginal cost below the price will
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Unformatted text preview: produce it. The high cost firms with marginal cost above price will not produce. Thus, production is done by those who can produce most cheaply. P Q S D Q* Adam Smiths Invisible Hand In a competitive market, individuals and firms who are driven by selfish motives behave in a way that leads to the social optimum. An invisible hand leads individuals and firms to promote an end that was not part of their original intention. Information Requirement is very low To maximize his own utility (and social good), consumer only needs to know (1) his own preferences and budget constraint and (2) market price The market price summarizes everything you need to know about the outside world To maximize profits, firm needs to know only its own cost conditions and the market price of the good it produces....
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This note was uploaded on 09/08/2008 for the course ECON 130 taught by Professor Staff during the Winter '08 term at UCSD.

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3 PPT_Efficiency - produce it. The high cost firms with...

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