Micro Economics
A. Khatibi
Notes de cours et résumé de syllabus
Academic Year 2023 - 2024
1
,1° Introduction :
Market Efficiency
2
,1. Pareto efficiency
Pareto efficiency = concept in economics that describes a situation where it's impossible to
make someone better off without making someone else worse off.
A Pareto inefficient outcome means there remain unrealized mutual gains-to-trade. Any
market outcome that achieves all possible gains-to-trade must be Pareto efficient allows
no “wasted welfare”.
Pizza model:
1. Divide the pizza in a way that both people are happy with their share, meaning
they both get the amount and types of slices they desire.
Pareto-efficient
2. Pizza is not divided in a way that both people are happy
Pareto-inefficient
Example:
- Jill has an apartment that she values at €200
- Jack wants an apartment that he would pay for €400
- Jill could subtle the apartment to Jack for €300
Both gain ; Pareto-inefficient for Jill to have the apartment
! In general, Pareto efficiency doesn’t have much to say about distribution of the gains from
trade. It is only concerned with the efficiency of the trade: whether all of the possible trades
have been made !
2. Perfect competition and efficiency
The competitive market is efficient because the market equilibrium maximizes social
surplus: This is the best that society as a whole can do if it is simply interested in
maximizing the total size of social surplus.
In the competitive market equilibrium, can we make any individual better off without
harming someone else?
No, Pareto efficiency.
Characteristics of perfect competition:
Market equilibrium maximizes social surplus
Pareto efficient/optimal
The best producers (those who can sell at very low prices) end up selling to the best
consumers (those with the highest willingness to pay).
3
, 3. The invisible hand (Adam Smith)
Main actors of market:
Buyers (self-interest: maximize utility)
Sellers (self-interest: maximize profit)
Adam Smith (The Wealth of Nations, 1776): “self-interest is a necessary ingredient for
an economy to function efficiently.”
When all of the assumptions of a perfectly competitive market are in place, the pursuit
of individual self-interest promotes the well-being of society as a whole.
= The invisible hand
! Prices Guide the Invisible Hand !
Market prices act as the most important piece of information, leading the high-value buyers
to buy and the low-cost sellers to sell.
For example:
Prices adjust until the quantity demanded of oceanfront property equals the quantity
supplied of oceanfront property.
Prices force entrepreneurs to produce their goods efficiently, that is with the lowest cost
possible.
Workers will go to sectors with the highest rewards causes.
When a government imposes a price control - by forcing a low price - it does not give
producers an incentive to supply the market.
4. Efficiency and equity
Efficiency = when a market economy effectively uses price signals to allocate resources,
minimize waste, and align individual interests with the broader interests of society,
ultimately maximizing social surplus and economic efficiency.
! the standard of maximizing social surplus is just one way to measure the progress of an
economy !
Equity = fair and equal distribution of resources and opportunities among market
participants within a market economy (how the economic pie is allocated to the various
economic agents).
Just because the competitive market equilibrium maximizes social surplus, and is
efficient, does not mean that the resulting distribution is morally satisfactory!
4
A. Khatibi
Notes de cours et résumé de syllabus
Academic Year 2023 - 2024
1
,1° Introduction :
Market Efficiency
2
,1. Pareto efficiency
Pareto efficiency = concept in economics that describes a situation where it's impossible to
make someone better off without making someone else worse off.
A Pareto inefficient outcome means there remain unrealized mutual gains-to-trade. Any
market outcome that achieves all possible gains-to-trade must be Pareto efficient allows
no “wasted welfare”.
Pizza model:
1. Divide the pizza in a way that both people are happy with their share, meaning
they both get the amount and types of slices they desire.
Pareto-efficient
2. Pizza is not divided in a way that both people are happy
Pareto-inefficient
Example:
- Jill has an apartment that she values at €200
- Jack wants an apartment that he would pay for €400
- Jill could subtle the apartment to Jack for €300
Both gain ; Pareto-inefficient for Jill to have the apartment
! In general, Pareto efficiency doesn’t have much to say about distribution of the gains from
trade. It is only concerned with the efficiency of the trade: whether all of the possible trades
have been made !
2. Perfect competition and efficiency
The competitive market is efficient because the market equilibrium maximizes social
surplus: This is the best that society as a whole can do if it is simply interested in
maximizing the total size of social surplus.
In the competitive market equilibrium, can we make any individual better off without
harming someone else?
No, Pareto efficiency.
Characteristics of perfect competition:
Market equilibrium maximizes social surplus
Pareto efficient/optimal
The best producers (those who can sell at very low prices) end up selling to the best
consumers (those with the highest willingness to pay).
3
, 3. The invisible hand (Adam Smith)
Main actors of market:
Buyers (self-interest: maximize utility)
Sellers (self-interest: maximize profit)
Adam Smith (The Wealth of Nations, 1776): “self-interest is a necessary ingredient for
an economy to function efficiently.”
When all of the assumptions of a perfectly competitive market are in place, the pursuit
of individual self-interest promotes the well-being of society as a whole.
= The invisible hand
! Prices Guide the Invisible Hand !
Market prices act as the most important piece of information, leading the high-value buyers
to buy and the low-cost sellers to sell.
For example:
Prices adjust until the quantity demanded of oceanfront property equals the quantity
supplied of oceanfront property.
Prices force entrepreneurs to produce their goods efficiently, that is with the lowest cost
possible.
Workers will go to sectors with the highest rewards causes.
When a government imposes a price control - by forcing a low price - it does not give
producers an incentive to supply the market.
4. Efficiency and equity
Efficiency = when a market economy effectively uses price signals to allocate resources,
minimize waste, and align individual interests with the broader interests of society,
ultimately maximizing social surplus and economic efficiency.
! the standard of maximizing social surplus is just one way to measure the progress of an
economy !
Equity = fair and equal distribution of resources and opportunities among market
participants within a market economy (how the economic pie is allocated to the various
economic agents).
Just because the competitive market equilibrium maximizes social surplus, and is
efficient, does not mean that the resulting distribution is morally satisfactory!
4
