Perfectly Competitive Economy and the Pareto Efficient
You have studied the perfectly competitive economy. You know the conditions needed for perfect competition to exist. You understand how individual decisions move the economy to equilibrium. You know what a Pareto efficient equilibrium means, and what it does not. You have also thought about what you consider fair in an economic system, and whether the competitive equilibrium meets your standards for an equitable distribution of society’s resources and wealth.
Pull this information together. Write an essay explaining and evaluating the perfectly competitive economy. Your audience is unfamiliar with economic theory. Make sure your essay clearly explains
• The assumptions behind perfect competition
• How the economy reaches equilibrium
• What ‘Pareto efficient’ means and what it does not
Then evaluate the perfectly competitive model. In this section of the essay, focus on the issues most important to you. Some possible questions to address: Are the assumptions realistic? Does perfect competition allocate resources correctly? Is the perfectly competitive outcome fair? Conclude with your opinion of the perfectly competitive model. What role should this idea play in society?
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Perfectly Competitive Economy
A perfectly competitive economy is a theoretical concept where the market comprises many small businesses selling to a large pool of customers. Following are some underlying assumptions of the concept. First, all the sellers have identical products, so it is impossible to tell which product comes from a particular firm. Secondly, buyers and sellers have complete access to accurate information concerning the market factors (Acedo-Ramírez et al., 2019). Thirdly, no firm is able to influence the price. Fourthly, there are no barriers in place. Anyone can enter or exit the market without any form of restriction. Lastly, there are no transaction costs. Therefore, the cost of buying and selling goods in the perfect market would be zero.
The economy reaches equilibrium when the total demand for goods equals the supply. At this point, the price is set at a level considered to factor in the best interests of buyers and sellers. This price is referred to as the market clearing price. In a situation where the market price is above the equilibrium price, there is a surplus of commodities, and prices will adjust downwards until the prevailing surplus is eliminated. On the other hand, if the market price is below the equilibrium price, there will be a shortage of goods supply which will result in a steady rise in price unit the shortage is eliminated (Chua et al., 2020). Consequently, in a perfectly competitive economy, the market reaches an equilibrium point when the total number of goods sold is just enough to meet the total demand.
Pareto efficiency is a concept that describes a situation where the reallocation of resources cannot continue without making someone either better off or worse off. Therefore, for any allocation of resources that advantages a person/ entity, then another person/ entity gets disadvantaged. It is analogous to saying that no one can become better off without making someone else worse...