Perfect Competition: Leftovers Econ 201 Lecture 20 Perfect Competition: Leftovers

The Invisible Hand What do we mean? The basic questions How do we allocate goods among consumers? How do we get firms to produce what consumers want? How do we get firms to produce goods efficiently, i.e. at minimum costs, and use resources efficiently?

Invisible Hand How could we allocate goods? Government could allocate “each according to his needs” Rationing/coupons Market Those whose willingness-to-pay >= market price

Invisible Hand How do we get firm to produce the goods consumers want? Government sets firm production quotas E.g. Soviet 5 and 10 year programs China: chose where to locate firms => but how do you know what consumers want? Market Firms decide to produce based on whether market demand (and WTP) are sufficient to cover their costs

Invisible Hand How do we get firms to produce goods efficiently? Government “benchmark” unit costs targets Mandate technology choices Market Profit incentive drives firms towards lowest cost of production

Efficiency of Markets Allocative Efficiency Productive Efficiency Goods go to those who value them most Buy if MV (last unit purchased) >= market price Efficient, given current distribution of income MV of resources used to produce the good are >= to opportunity cost of using resources to produce other goods Productive Efficiency Goods are produced at minimum costs (including opportunity costs) OTW “Economic Darwinism” kills off inefficient firms