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 doesn’t imply in terms of an economy and society.

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.

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.

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.

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).

Pareto Optimality: What it Isn’t

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.

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?