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

2. 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?

3. 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

4. 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

5. 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

6. 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