[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 10
THE EFFICIENCY OF
COMPETITIVE
MARKETS
∂
In earlier chapters, we focused on the product market and saw that supply
and demand come into balance at an equilibrium price and quantity. In equilibrium,
the quantity of goods demanded by consumers equals the quantity
supplied by firms. We have also seen that labor and capital markets achieve equilibrium
similarly. In the labor market, labor supply and demand come into balance
at an equilibrium wage; in equilibrium, the supply of labor by households
equals the demand for labor by firms. In the capital market, equilibrium is achieved
through adjustment in the interest rate; in equilibrium, the amount of savings supplied
by households equals the amount of borrowing by firms. When all three markets
are in equilibrium, the basic economic questions—What gets produced? By
whom? How? For whom?—are resolved through the interactions of households
and firms in the marketplace. When all of the economy’s central markets have
achieved equilibrium in this way, economists say that the economy is in general
equilibrium.
Understanding how markets provide answers to these basic economic questions
is important. But we also are interested in evaluating whether markets do a good
job. When the assumptions of the basic competitive model hold, will the economy
produce the right amounts of all the thousands and thousands of different goods
and services? Will society’s scarce resources be used efficiently? Once we evaluate how
markets in our basic competitive model operate, we will be ready to extend the model
in Part Three to deal with situations in which markets do not work perfectly (because
competition is not perfect, for instance).
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