Invisible Hand & Role of Prices

Invisible Hand
 Competition acts through prices
 Contain info about the desire and scarcity that coordinate actions of self
 Any competitive equilbrium leads to a Pareto efficient allocation of resources
 Pareto efficient / Pareto optimality
o An economic state where resources cannot be reallocated to make one individual
bettwe off without making at least one individual worse off
 First Welfare Therorem
o A competitive market results in an efficient allocation of resources

Elasticity of Consumer Demand

 Responsiveness of consumer in the change of price that he/she is consuming

Types of elasticity
 Price elasticity of demand
o Change in price

When demand is relatively inelastic (Not very responsive), increasing the price will increase the firm's
total revenue

 They will still buy the product with any given price change
 If not responsive = you can increase the price

When demand is relatively elastic (Very responsive in the change of price), decreasing the price will
increase the firm's total revenue

Market Power
 Business's ability to affect the price it charges
 Varies with market structure, such that monopolist have the most and perfect competitors have
the least