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© 2009 Pearson Education, Inc. Publishing as Prentice Hall   Principles of Economics 9e by Case, Fair and Oster

Allocative Efficiency and Competitive Equilibrium

The Efficiency of Perfect Competition

The three basic questions discussed previously included:

1. What gets produced?  What determines the final mix of output?

2. How is it produced?  How do capital, labor, and land get divided up among firms?  In other words, what is the allocation of resources among producers?

3. Who gets what is produced?  What determines which households get how much?  What is the distribution of output among consuming households?

To demonstrate that the perfectly competitive system leads to an efficient, or Pareto optimal, allocation of resources, we need to show that no changes are possible that will make some people better off without making others worse off.

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