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Principles of Economics- Mankiw (5th) 150

Principles of Economics- Mankiw (5th) 150 - 156 PA R T T H...

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156 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE even though each buyer and seller in a market is concerned only about his or her own welfare, they are together led by an invisible hand to an equilibrium that maximizes the total benefits to buyers and sellers. A word of warning is in order. To conclude that markets are efficient, we made several assumptions about how markets work. When these assumptions do not hold, our conclusion that the market equilibrium is efficient may no longer be true. As we close this chapter, let’s consider briefly two of the most important of these assumptions. First, our analysis assumed that markets are perfectly competitive. In the world, however, competition is sometimes far from perfect. In some markets, a sin- gle buyer or seller (or a small group of them) may be able to control market prices. This ability to influence prices is called market power. Market power can cause mar- kets to be inefficient because it keeps the price and quantity away from the equi- librium of supply and demand.
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