necessarily least-cost suppliers; all other higher-cost would-be suppliers are
priced out of the market. (In our example, grandmothers cannot compete;
“store-bought” day care is more efficiently supplied than “home-made.”) The
supply curve in Figure 7.7 is not drawn arbitrarily; rather, it describes the low-
estpossible costs of production. In this sense, production is efficient.
Second, competitive markets obey the “law of one price”; that is, all buyers
and suppliers face the same price. In particular, this means that only consumers
who are most willing (and able) to pay this price (i.e., those who reside on the
highest portion of the demand curve) will actually end up with the goods. In
this sense, consumption is efficient.
Third, given the market selection of minimum-cost producers and maxi-
mum-value consumers, the optimal output is achieved at the competitive inter-
section of supply and demand. Since PCMB MC, it is impossible to alter
output—above or below the competitive level—and increase net benefits. In
this sense, the level of output is efficient.302 Chapter 7 Perfect CompetitionCHECK
STATION 5What are the efficiency implications of a government program to provide universal, free
day care?EFFICIENCY AND EQUITY It is important to emphasize that efficient markets
are not necessarily equitable or fair. The outcomes of competitive markets
directly reflect the distribution of incomes of those who buy and sell in these
markets. An inability to pay excludes many people from the economic equa-
tion. In trying to solve the problems of poverty, malnutrition, inadequate health
care, and the like, the government has the responsibility of addressing equity
issues (as well as efficiency issues).DYNAMIC, MARKETWIDE EFFICIENCY In our examination of competitive effi-
ciency, we have focused on a singlemarket and found that the efficient level of
output occurs at the intersection of demand and supply, where PCMB
MC. Can this “invisible hand” result be extended to encompass at once all the
innumerable markets in a modern economy? The generalization to multiple
markets is more complicated than it might seem at first. When dealing with
many markets, it is not quite correct to focus on them separately, one at a time.
After all, demands for different goods and services in the economy are inter-
dependent. Changing the price of one good affects not only its consumption
but also the consumption of substitute and complementary goods. Similarly,
any change in price and output in one market generates marginal benefits and
costs not only for that good but also for other affected markets. Given these
interdependencies, can we draw any conclusions about the workings of private
markets and economic efficiency?
Modern economic theory provides an elegant and important answer to this
question: If all markets in the economy are perfectly competitive, the economy as a whole
is efficient; that is, it delivers an efficient quantity of each good and service to consumersc07PerfectCompetition.qxd 9/29/11 1:30 PM Page 302