![]() ![]() the market jumps from one equilibrium to the other as a result of a shock through some magic wand. The only way a perfectly competitive market can be efficient during the transition is that the economic shock itself instantly settles the price and quantity from one equilibrium to the other, i.e. either it gets stuck in an “out of equilibrium” state (under the agents’ price-taking assumption) or a market agent changes the price to bring the new equilibrium, in which case, the transition cannot occur free of cost and has to come at the expense of some economic efficiency! This also implies that a perfectly competitive market has to incur some inefficiency after an economic shock, i.e. A producer cannot be a “price taker” and a “price changer” at the same time, however, with the only assumption of “price-taking behavior”, the market will logically get stuck in an “out of equilibrium” state for an infinite period of time leading to an infinite level of inefficiency, whereas, the assumption of a “price changer” for a market agent (which is inevitable to explain the change in price from one equilibrium to the other) implies at least a minimal level of market power. In this scenario, it is impossible to provide a theoretical framework for some drifting mechanisms for a perfectly competitive market from one equilibrium to the other, as the “price taking” and the “price changing” assumptions contradict each other. No other market agents (responsible for the movement of prices) have been defined under the theoretical concept of a perfectly competitive market. If the producers have to be assumed of changing the price when the market is out of equilibrium, it comes in direct conflict with the assumption of the producers being “price takers”. In a perfectly competitive market, all producers are price takers and the prices are perfectly flexible, however, a central question to the discussion is: who changes the price after an economic shock to the market to lead to a new equilibrium? If no one changes the price, then supply will never equalize the demand after an economic shock, resulting in an infinite level of inefficiency. There is an inherent limitation in the definition of a perfectly competitive market, which precludes the explanation of the movement of the market price after an economic shock. ![]() However, the existing literature inadequately addresses the efficiency issue on the dynamic adjustment path of the market after an economic shock before it arrives at a new efficient equilibrium, and rather an adjustment mechanism has never been defined clearly for a perfectly competitive market. This result is the core principle of all modern Samuelsonion welfare economics. This research models the dynamic facet of the market andĬoncludes that Adam Smith’s perfectly competitive market is not ParetoĮfficient and coordinated ac tions of economicĪgents can result in a level of economic efficiency on t he dynamic adjustment path which is not achievableīy a free market mechanism (JEL D40, D41, D50, E32).Īdam Smith’s invisible hand was a clever mechanism for describing how information, idiosyncratic and dispersed among individuals, is accumulated and combined by the market mechanism such that the overall market equilibrium is the same as that would be obtained by an all-knowing social planner. howĮfficient is a perfectly competitive market on the dynamic adjustment pathĪfter an economic shock in the absence of all kinds of frictions and price rigidities, and if all the ideal conditions are Existing lite ratureĭoes not consider the most important dynamic facet of the perfectlyĬompetitive market from the perspective of Pareto efficiency, i.e. a competitive market is efficient in an equi librium and the second one is that if theĬompetitive market is disturbed from its equilibrium position, in theĪbsence of a market failure and frictions, the market automatically settles atĪ new efficient equilibrium. Two well-known facets of the invisible hand are generally mentioned in the economics literature -the first one is a static picture of a perfectlyĬompetitive market, i.e. Members of the society and hence to the so cietyĪs a whole. ![]() Market settles at an efficient outcome that is beneficial to all the individual If each consumer and producer are allowed to freely make their own choices, the Competitive market refers to the self-regulating behavior of the market where
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