2. General Equilibrium Analysis A Technological Advance: The Electronic Calculator Market Adjustment to Changes in Demand Formal Proof of a General Competitive Equilibrium Allocative Efficiency and Competitive Equilibrium Pareto Efficiency The Efficiency of Perfect Competition Perfect Competition versus Real Markets The Sources of Market Failure Imperfect Markets Public Goods Externalities Imperfect Information Evaluating the Market Mechanism

3. Input and output markets cannot be considered separately or as if they operated independently. While it is important to understand the decisions of individual firms and households and the functioning of individual markets, we now need to add it all up, to look at the operation of the system as a whole.

5. Five features of a perfectly competitive market: There are many sellers. There are many buyers. The product is homogeneous. There are no barriers to market entry. Both buyers and sellers are price takers.

6. partial equilibrium analysis The process of examining the equilibrium conditions in individual markets and for households and firms separately. general equilibrium The condition that exists when all markets in an economy are in simultaneous equilibrium. efficiency The condition in which the economy is producing what people want at least possible cost.

7. 1960s developed by Wang Lab $ 1500 1970s Silicon chip Costs fell dramatically

8. In the 1970s and 1980s, major technological changes occurred in the calculator industry. In 1975, 18.1 million calculators were sold at an average price of $62. As technology made it possible to produce at lower costs, cost curves shifted downward. As new firms entered the industry and existing firms expanded, output rose and market price dropped. In 1983, 30.9 million calculators were produced and sold at an average price of under $30.

9. Initially, demand for X shifts from D X to D X. This shift pushes the price of X up to P Y creating profits. Demand for Y shifts down from D Y to D Y, pushing the price of Y down to P Y and creating losses. Firms have an incentive to leave sector Y and an incentive to enter sector X. Exiting sector Y shifts supply in that industry to S Y, raising price and eliminating losses. Entry shifts supply in X to S X thus reducing and eliminating profits.

10. The economy will produce an efficient allocation of resources if : 1.output markets are perfectly competitive 2.input markets are perfectly competitive 3. households have perfect information on product quality and on all prices available 4. firms have perfect knowledge of technologies and input prices 5. decision makers consider all the costs and benefits of their decisions

12. The three basic questions discussed previously included: What gets produced? What determines the final mix of output? How is it produced? How do capital, labor, and land get divided up among firms? In other words, what is the allocation of resources among producers? Who gets what is produced? What determines which households get how much? What is the distribution of output among consuming households? To demonstrate that the perfectly competitive system leads to an efficient, or Pareto optimal, allocation of resources, we need to show that no changes are possible that will make some people better off without making others worse off.

14. Within the constraints imposed by income and wealth, households are free to choose among all the goods and services available in output markets. Utility value is revealed in market behavior. As long as everyone shops freely in the same markets, no redistribution of final outputs among people will make them better off.

16. Efficiency in perfect competition follows from a weighing of values by both households and firms.

17. We have built a model of a perfectly competitive market system that produces an efficient allocation of resources, an efficient mix of output, and an efficient distribution of output. The perfectly competitive model is built on a set of assumptions, all of which must hold for our conclusions to be fully valid. These assumptions do not always hold in real-world markets.

18. Market failure occurs when resources are misallocated, or allocated inefficiently. The result is waste or lost value. Evidence of market failure is revealed by the existence of: Imperfect markets Public goods Externalities Imperfect information

19. In all imperfectly competitive industries, output is lower—the product is underproduced—and price is higher than it would be under perfect competition. The equilibrium condition P = MC does not hold, and the system does not produce the most efficient product mix.

20. Private provision of public goods fails. A completely laissez-faire market will not produce everything that all members of a society might want. Citizens must band together to ensure that desired public goods are produced, and this is generally accomplished through government spending financed by taxes.

21. The market does not always force consideration of all the costs and benefits of decisions. Yet for an economy to achieve an efficient allocation of resources, all costs and benefits must be weighed.

22. The conclusion that markets work efficiently rests heavily on the assumption that consumers and producers have full knowledge of product characteristics, available prices, and so forth. The absence of full information can lead to transactions that are ultimately disadvantageous.

23. Freely functioning markets in the real world do not always produce an efficient allocation of resources, and this result provides a potential role for government in the economy.