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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

Efficient Allocation of Resources among Firms

The assumptions that factor markets are competitive and open, that all firms pay the same prices for inputs, and that all firms maximize profits lead to the conclusion that the allocation of resources among firms is efficient.

You should now have a greater appreciation for the power of the price mechanism in a market economy. Each individual firm needs only to make input use decisions by looking at its own labor, capital, and land productivity relative to their prices. But because all firms face identical input prices, the market economy achieves efficient input use between firms. Prices are the instrument of Adam Smith’s “invisible hand,” allowing for efficiency without explicit coordination or planning.

The Efficiency of Perfect Competition

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