Scribd Logo
Upload

Welcome to Scribd!

  • Smith's Invisible Hand Theorem

    Uploaded by

    Jaskarn Singh
    28 views4 pages
    Individuals acting in their own self-interest in a competitive market, through voluntary exchange, can promote the general benefit of society without intending to do so. This is known as the "invisible hand" theorem. The document proves that competitive market equilibrium is efficient by showing that: 1) Equilibrium occurs where buyers with highest value meet sellers with lowest cost; 2) No profits can be gained by substituting different buyers and sellers; 3) Adding or reducing trades cannot increase total profits. Therefore, competitive markets maximize total profits and allocate resources efficiently without central coordination.

    Original Description:

    Economics market efficiency notes

    Original Title

    F5 Efficiency Notes

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Individuals acting in their own self-interest in a competitive market, through voluntary exchange, can promote the general benefit of society without intending to do so. This is known as the "invisible hand" theorem. The document proves that competitive market equilibrium is efficient by showing that: 1) Equilibrium occurs where buyers with highest value meet sellers with lowest cost; 2) No profits can be gained by substituting different buyers and sellers; 3) Adding or reducing trades cannot increase total profits. Therefore, competitive markets maximize total profits and allocate resources efficiently without central coordination.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    28 views4 pages

    Smith's Invisible Hand Theorem

    Uploaded by

    Jaskarn Singh
    Individuals acting in their own self-interest in a competitive market, through voluntary exchange, can promote the general benefit of society without intending to do so. This is known as the "invisible hand" theorem. The document proves that competitive market equilibrium is efficient by showing that: 1) Equilibrium occurs where buyers with highest value meet sellers with lowest cost; 2) No profits can be gained by substituting different buyers and sellers; 3) Adding or reducing trades cannot increase total profits. Therefore, competitive markets maximize total profits and allocate resources efficiently without central coordination.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 4

    10/5/18

    Efficiency
    Today’s Agenda
    •  Define a “good” outcome from trade

    •  Show that competitive equilibrium


    achieves that outcome

    •  “The Invisible Hand Theorem”

    Adam Smith,
    What does Smith mean?
    The Wealth of Nations, 1776
    •  Individuals promote only their own
    “Every individual neither intends to
    interests, but in doing so they
    promote the public interest, nor knows
    promote the public interest
    how much he is promoting it. He
    intends only his own gain, and he is in
    •  What is this invisible hand?
    this led by an invisible hand to promote
    an end which was no part of his
    •  Market competition
    intention.”

    1
    10/5/18

    Efficiency is a good thing Equilibrium


    $50

    Price of Bushel
    •  If efficient, can’t rearrange trades to $40
    make someone better off without
    making someone else worse off $30

    $20
    •  Is competitive equilibrium efficient?
    $10
    •  First, review competitive equilibrium.
    10 20 30 40
    Bushels of Apples

    The Invisible Hand Theorem Proof


    •  Outcomes result from exchanges
    •  A competitive equilibrium is efficient.
    •  Profit from any exchange =
    buyer value – seller cost

    •  Total profit determined only by who


    trades and who doesn’t

    2
    10/5/18

    Proof continued Equilibrium


    Can we
    •  For most profit, want buyers with $50
    increase

    Price of Bushel
    highest buyer value and sellers with profit by $40
    lowest seller cost substituting
    someone $30
    •  Competitive equilibrium does that who didn’t
    trade for $20
    someone $10
    •  Can’t increase profits by different who did?
    traders, holding the number of
    10 20 30 40
    traders constant
    Bushels of Apples

    Proof continued Equilibrium


    Can we
    •  How about increasing the number of $50
    increase
    Price of Bushel

    trades? profit by $40


    •  Have seller who didn’t sell trade with arranging a
    buyer who didn’t buy transaction $30
    •  Buyer value less than or equal to between a
    buyer and $20
    price
    seller who $10
    •  Seller cost greater than or equal to didn’t
    price trade?
    10 20 30 40
    •  Profit on this trade can’t be postive
    Bushels of Apples

    3
    10/5/18

    More proof Bottom Line


    •  How about decreasing the number •  Different exchanges don’t increase
    of trades? profits

    •  That would decrease total profits •  Competititve equilibrium maximzes


    because each trade is profitable total profit

    •  Competitive equilibrium is efficient

    What Have We Done Today?


    •  Defined efficient outcome

    •  Showed why competitive


    equilibrium is efficient •  Submit homework by 11 pm
    Tuesday night

    •  Next lecture: cost and supply


    (Reader 85-97)

    You might also like