Equilibrium with Many Consumers and Markets

Let us now turn from our simple parable about identical farmer-consumers to an economy populated by millions of different firms, hundreds of millions of people, and countless commodities. Can a perfectly competitive economy still be efficient in this more complex world?

The answer is “yes,” or better yet, “yes, if. .,.” Efficiency requires some stringent conditions that are addressed in later chapters. These include having reasonably well-informed consumers, perfectly competitive producers, and no external cities like pollution or incomplete knowledge. For such economies, a system of perfectly competitive markets will earn the economist’s gold star of allocation efficiency,

Figure 8-12 ‘on page 160 illustrates how a competitive system brings about a balance between utility and cost for a single commodity with nonidentical firms and consumers, On the left, we add horizontally the demand curves for all consumers to get the market curve DD in the middle. On the right, ,we add all the different firms’ Me curves to get the industry SS curve in the middle. .

At the competitive equilibrium at point E, consumers on the left get. the quantity they are willing to purchase of the good at the price reflecting efficient social Me. On the right. the equilibrium market price also allocates production efficiently among firms.

The gray area under SS in the middle represents the rein minimized sum of the gray cost areas on the right. Each fin is setting its output so that Me = P. Production ‘ efficiency is achieved because there is no reorganization of production that would allow the same level of . industry output to be produced at lower cost,

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