Perfect Competition, General Equilibrium, and Social Welfare Handout Assumptions of perfect competition: 1. Many buyers and sellers 2. Homogeneous output 3. No external effects 4. Perfect information 5. Individuals act in their own best ‐ interest If an assumption of perfect competition is violated, we say there is a market failure (or market friction ). ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Partial equilibrium: The equilibrium of supply and demand in a single market. General equilibrium: The equilibrium of supply and demand in all markets simultaneously. 1 st Fundamental Theorem of Welfare Economics : Under the assumptions of perfect competition, the general equilibrium is Pareto efficient. 2 nd Fundamental Theorem of Welfare Economics : Under certain conditions including perfect competition, every Pareto efficient allocation can be achieved as the general equilibrium by an appropriate lump ‐ sum redistribution of the initial endowment. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Individual
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This note was uploaded on 04/07/2012 for the course ECON 3010 at Cornell.