Chapter 8: General Competitive Equilibrium

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Chapter 8 General Competitive Equilibrium

• Brief chapter, examines more in detail the
  concept of General Competitive Equilibrium (GCE),
  the standard of highest efficiency in a market
  system.
• What GCE implies, and what it doesnt imply in
  terms of an economy and society.

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General Equilibrium Vs GCE

• General Equilibrium the situation in which all
  markets (goods and factor) are simultaneously in
  equilibrium.
• General Competitive Equilibrium (GCE) the
  situation in which all perfectly competitive
  markets are in equilibrium simultaneously with
  the nice assumptions satisfied.
• Inherent in the definition of GCE is that the
  nice assumptions (no market power and no market
  failure) are in effect.

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GCE and Pareto Optimality

• GCE implies that the economy operates under the
  condition of Pareto Optimality, the standard of
  highest efficiency in a market system.
• Pareto Optimality a situation where there is no
  way to make one person better off without making
  someone else worse off.
• GCE ? Pareto Optimality, but the converse is not
  necessarily true.

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Characteristics of a Pareto
Optimal Economy

• No slack or inefficiency in the production
  process (e.g. involuntary unemployment).
• No distribution problems (demand and supply, but
  no market).
• No way to reallocate the (scarce) resources to
  make someone better off without taking anything
  away from someone else.

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Pareto Optimality What it Is

• Pareto Optimality implies that the Social Product
  of members of a society roughly equals their
  Social Endowment (they get out what they bring
  in).

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Pareto Optimality What it
Isnt

• Pareto Optimality does not imply the resources of
  a society will be distributed equally or even
  justly across the members (Distributive Justice).
• Even in a Pareto Optimal Society, there exist
  differences in initial endowments, preferences
  toward work and consumption, and technology.

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A Look Ahead

• Chapter 9 How Pareto Optimality can be
  distorted in a market economy Market Power, and
  Market Failure.
• Chapter 10 The role(s) and problems of
  government in trying to eliminate or compensate
  for these distortions. Also, how much (if at
  all) should government work to improve
  Distributive Justice in a society?