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Chapter 8: General Competitive Equilibrium

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.

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Chapter 8: General Competitive Equilibrium

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  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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).

  6. 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.

  7. 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?

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