Chapter 3

MARKET
EFFICIENCY
Two fundamental welfare theorems

1. Every competitive economy is pareto efficient (An allocation

of resources such that no person can be made better off without
making another person worse off.)

2. Every Pareto efficient resource allocation can be attained

through a competitive market mechanism, with the
appropriate initial redistributions.
Why the competitive market, under ideal conditions, leads
to a Pareto optimal allocation of resources is one of the
primary subjects of study in standard courses in
microeconomics.
  𝑀𝑅 𝑆 𝑎𝑜

  At point “E” ;
 𝑃𝑜 / 𝑃𝑎

Exchange
Efficiency
The same can be analyzed through the Edgeworth
Box

Which is a;

A device used to depict the distribution of goods

in a two good & two-person world.
 Oranges Essa

Apples Apples

Ahmed Oranges
Indifference curves in an Edgeworth Box
Making Ahmed better off without Essa becoming worse off
Making both Ahmed and Essa better off
Starting from a different initial point
 The contract curve

  On every point;

This was the case of

Exchange Efficiency
Production
Efficiency
 𝑀𝑅𝑇𝑆=𝑃𝑙 / 𝑃 𝐿
  On every point; Production Efficiency
 Product Mix Efficiency

How much is preferred What is technically

by the consumer of feasible to be
what product? produced?
 MRS=price ratio
MRTS=price ratio
MRTS=MRS

  At point “E” ;