Topic 8: Partial Equilibrium and Perfect Competition Flashcards
basis of this section
what conditions do we have to impose such that trade through market prices gets us the most value out of our resources
value is subjective and personal (based on consumer preference)
conditions of perfectly competitive markets
price-taking
homogenous goods
perfect information
free entry and exit in the long run
consumer surplus
how much more people are willing and able to pay over equilibrium price for what they get
producer surplus
how much less people are willing and able to accept for selling a good
social efficiency
maximises net benefit to society (consumer + producer surplus)
theoretical welfare results
two welfare theorems and fairness result
conditions under which the market mechanism is good, according to theoretical metrics based on preferences
when we want to evaluate quantity, pareto efficiency and fairness are difficult to apply
- don’t know everyone’s preferences
condorcet’s paradox
impossible to please everyone with social choice
social preferences are intransitive
arrow’s impossibility theorem
no aggregation mechanism can satisfy all properties
rule takes complete, transitive and reflexive individual preferences and return a complete, transitive and reflexive social ordering
if everyone prefers a to b, the social ordering ranks a above b
social ordering of a and b depends only on how individual preferences rank a and b, not the ranking of an alternative c or other information
social ordering does not coincide with any individual’s preferences
compromises and arrow’s theorem
abandoning the notion that the social ranking of a and b should only depend on ranking of a and b by individuals
intensity of preference
- account for how much each person prefers an alternative to another
utilitarian social welfare function
best allocation is one that delivers the greatest total wellbeing
minimax social welfare function
society is only as well off as its worst off citizen
cobb-douglas social welfare function
balancing the amount of happiness/misery
issue of efficiency in demand/supply
equivalent to maximising consumer and producer surplus
utilitarian and measured in dollars
- favours the rich since consumer surplus is based on willingness and ability to pay
similar to how in the exchange economy, unequal outcomes are pareto efficient from a given endowment
