ECN 203 1st Edition Lecture 7Outline of Last Lecture II. Basic Market A. Supply/Demand Attitudes B. Market Picture C. Market CoordinationD. Market Shifts E. The Signal F. The Magic of Marketsa. The Invisible Hand Outline of Current Lecture III. Two Basic Players a. Individuals b. Firms c. The circular flowIV. General Equilibrium V. Cases of GEa. General Competitive Equilibrium b. Two Conditions VI. Perfect Competition and Efficiency a. Pareto Optimal VII. Exploring the market system under our nice assumptions Current Lecture3.4 1/30/15The General Market System - Two Basic Players – assuming, for the moment, no gov’t o Individuals – who came to the market with preferences and share of society’s “initial endowment”… the factors of production o Firms – that come to the market with the available technology o Representing the connection between individuals and firms These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. The Circular Flow o There are literally billions of individuals interacting in millions of markets o The general system of markets is a complex web of connections - General Equilibrium o When all the markets are in equilibrium simultaneously there is a General Equilibrium (GE) Given (Distribution of Initial Endowment, Preferences, Technology )  GE (determines)  Outcome (allocation of resources.. What’s produced, Prices, Distribution)o GE is just a theoretical reference point toward which we imagine the system is tending…. It’s never actually realized because the conditions within which markets functionare always changing - Cases of GEo General Competitive Equilibrium – a special case among the possible GE… a unique GE inwhich perfect competition makes the system perfectly efficient o For now we will assume the two conditions that give rise to a GCE No market power - All individuals have equal access to info and market  No market failure - Markets form quickly when and where needed and function quickly and smoothly  These are called our “Nice Assumptions” because they are the foundation of a nice societal outcome – perfect efficiency - Perfect Competition and Efficiency o Everyone gets the most out of the resources they bring to the market and as a society we produce the biggest possible “pie”o There is no waste… no “slack” lefto Economists call this “Pareto Optimal” The economist’s standard of perfect efficiency o Economists describe a Pareto Optimal condition as one in which “you can’t make one person better off without making someone else worse”o Equity has to do with the distributive justice of the outcome… is it fair?o There is no economic standard of equity  Equity is a moral, not an economic question o Under a perfectly competitive GCE condition… The shares of the distribution of the fruits of economic activity among individuals will,  “map” from the shares of the resources brought by individuals to the system o If you own a large share of society’s initial endowment and bring it to the market…. You’ll get a similarly large share of the output from the market - Exploring the market system under out nice assumptions o But for now we’re going to assume away the distortions of  Market power and market failure o And we’ll explore the inner workings of system when it’s functioning most efficiently  Under our “nice