Overview: Perfect Competition and Efficiency

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This group of readings applies and extends the analysis of rational consumer choice. It begins by abandoning the assumption that utility can be measured. Instead, a set of indifference curves represents a person's preferences, and that person strives to find the point on the highest indifference curve that his budget allows. The maximization and equimarginal principles are still there, but behind the scenes.

We also discover the concept of consumers' surplus and see how this concept dissolves the paradox of value. Finally, we add the concept of producers' surplus, and see how fights over the division of surpluses can reduce the total.

After you complete this unit, you should be able to:

  • Interpret information on a graph showing a budget constraint and indifference curves.
  • Define consumers' surplus and explain how it is measured on a demand curve.
  • Define producers' surplus and explain how it is measured on a supply curve.
  • Explain the paradox of value.
  • Explain why a competitive market economy can, in theory, be economically efficient.
Copyright Robert Schenk