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F5 Efficiency Notes
F5 Efficiency Notes
Efficiency
Today’s Agenda
• Define a “good” outcome from trade
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.”
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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
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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
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