Sign In Question: The first fundamental Theorem of Welfare Economics requires:
🔑Key Points:
The first fundamental theorem of welfare economics
The first fundamental theorem of welfare economics postulates that general competitive equilibrium is Pareto Optimal, i.e., General equilibrium attained in a perfect competition market for goods and factors exhausts all the possibilities of increasing the welfare of the individuals from an exchange between them or the use and allocation of resources in the production of different goods. 🛑Important Points:Efficient market for every commodity
An efficient market is one in which all the economic participants have equal access to market information, all the firms and consumers are price takers, and firms are free to enter and exit the industry.
A competitive market economy provides an efficient means of allocating scarce resources.
Producers and consumers to be price takers
In the case of perfectly competitive markets, prices of commodities are determined through the interplay of demand and supply forces operating in the economy.
All the firms sell their produce at a price determined by the industry, and all the buyers are free to purchase any quantity at the prevailing price.
Hence, all the producers and consumers are price takers in a perfectly competitive market.
The economy operates at some point on the utility possibility curve
The curve OAOBÂ in the image is the utility possibility curve which represents the Pareto optimal allocation of resources in an economy.
Points lying on the utility possibility curve (E, F, and G) depict Pareto optimal allocations.
Point H depicts Pareto-inefficient allocation as it lies below the utility possibility frontier.
Thus, the first fundamental theorem of welfare economics requires that there should be an efficient market for every commodity, producers and consumers should be price takers, and, the economy should operate at some point on the utility possibility curve.
The first fundamental theorem of welfare economics
The first fundamental theorem of welfare economics postulates that general competitive equilibrium is Pareto Optimal, i.e., General equilibrium attained in a perfect competition market for goods and factors exhausts all the possibilities of increasing the welfare of the individuals from an exchange between them or the use and allocation of resources in the production of different goods. 🛑Important Points:Efficient market for every commodity
An efficient market is one in which all the economic participants have equal access to market information, all the firms and consumers are price takers, and firms are free to enter and exit the industry.
A competitive market economy provides an efficient means of allocating scarce resources.
Producers and consumers to be price takers
In the case of perfectly competitive markets, prices of commodities are determined through the interplay of demand and supply forces operating in the economy.
All the firms sell their produce at a price determined by the industry, and all the buyers are free to purchase any quantity at the prevailing price.
Hence, all the producers and consumers are price takers in a perfectly competitive market.
The economy operates at some point on the utility possibility curve
The curve OAOBÂ in the image is the utility possibility curve which represents the Pareto optimal allocation of resources in an economy.
Points lying on the utility possibility curve (E, F, and G) depict Pareto optimal allocations.
Point H depicts Pareto-inefficient allocation as it lies below the utility possibility frontier.
Thus, the first fundamental theorem of welfare economics requires that there should be an efficient market for every commodity, producers and consumers should be price takers, and, the economy should operate at some point on the utility possibility curve.
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