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Chapter Review Chapter 10: The Efficiency of Competitive Markets

  1. General equilibrium in the basic competitive model occurs when wages, interest rates, and prices are such that demand is equal to supply in all labor, capital, and product markets. All markets clear.
  2. The competitive equilibrium maximizes the sum of consumer and producer surplus.
  3. Under the conditions of the basic competitive model, the economy’s resource allocation is Pareto efficient: that is, no one can be made better off without making someone worse off.
  4. The distribution of income that emerges from competitive markets may be very unequal. However, under the conditions of the basic competitive model, a redistribution of wealth can move the economy to a more equal allocation that is also Pareto efficient.
  5. Changes in one market will have effects on other markets. To analyze the effects of a tax, for example, general equilibrium analysis takes into account the effects in all markets. But when the secondary repercussions of a change are small, partial equilibrium analysis, focusing on only one or a few markets, is sufficient.
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