The model of perfect competition can be achieved through a formalization of the concept of the 'invisible hand of the market'. This theory was put forward by by Adam Smith in 1776. His goal was to provide a stable base to build a society on . This concept involved an environment in which individual research satisfaction achieved a balance that could be considered to be optimal.
A market of perfect competition is supposed to lead to a Pareto optimum. In this paper we ask the question : How can perfect competition achieve this Pareto optimum?
The perfect competition is a model of economic theory that describes a hypothetical market structure in which no economic agent can use its power to influence the other in its discretion.
Tags - Adam Smith, invisible hand of the market,Pareto optimum, Pure competition
[...] Effectiveness of the combination of goods produced. The marginal rate of transformation (TMT) between two goods, which indicates the amount of goods that a company Y sacrifices in exchange for X amount of goods, must equal the marginal rate of substitution between two goods The perfect competition leads to Pareto optimal The three necessary conditions for Pareto optimal are verified in a situation of perfect competition. - Exchange efficiency and equality of TMS: A rational consumer equates the MRS between two goods the relative price of these goods that is to say that it equalizes the marginal utilities of two goods by weighing them by their price. [...]
[...] And only the intervention of the state seems to find that individuals take into the account of the costs can benefit their collective decision (it is said that the state will seek to "internalize" these externalities) Thus, we see that in a competitive economy, the basic condition of the effectiveness of the combination of goods produced is done necessarily. On the one hand, companies equate their TMT and relative prices and secondly, consumers equate their TMS and these relative prices. However, the existence of externalities helps to challenge the parallel drawn between CPP and easily Pareto optimality. [...]
[...] The marginal rate of substitution (MRS) between any two goods must be identical for all consumers. If the two TMS consumer is different, there is an opportunity for exchange that may improve the situation of one without damaging the other's, as it will remain as untapped opportunities for exchange. Production Efficiency The marginal rate of technical substitution (WMSD) between the two inputs must be identical in all businesses as the WMSD are not identical and can increase overall production in companies. [...]
[...] We have: (CMY / CMX) = (pY / pX) and therefore TMS = TMT This is fully verified in a situation of CPC. The CPC fulfills the three conditions of allocative efficiency (Pareto). Thus it seems to have a formal demonstration of the law of the "invisible hand": people guided by reason of self-interest can achieve the collective interest through the exchange market. Yet even in a market in PPC production externalities by firms can no longer reach the Pareto optimum. [...]
[...] How can perfect competition achieve this Pareto optimality? Concepts of perfect competition and Pareto optimality The perfect competition (PPC) The perfect competition model is an economic theory that describes a hypothetical market structure in which no economic agent can use its power to influence the other on a discretionary basis. The CPC is intended to allow equilibrium in all markets under special conditions: - Atomicity of supply and demand: there are a large number of buyers and sellers in the market and all have similar weight, so that no particular agent can influence the pricing of goods The homogeneity of the products: Traded goods are similar in quality and features; a better quality product is therefore in another market. [...]
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