More Assumptions
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But, for this to work, the following also has to be true:
1. The market must be perfectly competitive.
2. The market must be perfectly free.
3. There must be so many firms and households that the
actions of one have no affect on the other. No one may have so big a share of
the market that their actions alone may move prices or supply.
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4. The total quantity and quality of the resources must be
constant
5. Ultimately, the payments going to the firms must equal the
payments to the household. This is inevitable if the system is closed.
Sounds Crazy, but it works well enough.
It may even work really well in traditional society!
pareto efficiency
household demand
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