Equilibrium and Efficiency
What we have seen is that an "optimal plan" will set the output of machines in Economia just large enough that the marginal cost of machines is equal to the marginal benefit of machines. We should stress again that this is hypothetical. We have no evidence that any real-world planned economy has very come close to this sort of efficient allocation of resources, or even tried. However, it is a basis for comparison. How will a competitive economy, in which outputs are determined by supply and demand, do by comparison with this ideal efficient economic plan?
To answer that question, we need to recall some principles from earlier chapters: - in a P-competitive market,
- demand is the same as marginal benefit and
- supply is the same as marginal cost.
- Therefore, to say that quantity supplied equals quantity demanded is to say that
marginal benefit equals marginal cost
The conditions for efficient allocation of resources and the conditions for market equilibrium are exactly the same!
This leads to what we shall call the "fundamental principle of microeconomics:"
FUNDAMENTAL PRINCIPLE OF MICROECONOMICS: If
- All goods, services and resources are paid for by those
who benefit from them, and
-
the payment is at P-Competitive equilibrium prices,
then
-
output quantities are efficient.
