From market efficiency theory, markets are optimized when marginal cost (MC) = marginal benefit (MB). This is a strong idea - one that has shaped economies around the world.

This has been proven mathematically.

But this is based on many assumptions that are disputable

1. Many buyers and sellers

   • No single participant can influence the market price — everyone is a price taker.

   • Ensures that price reflects aggregate supply and demand, not power dynamics.

• Homogeneous products

  • Goods are identical from all producers’ perspectives.

  • Buyers care only about price, not brand or quality differences.

• Perfect information

  • All buyers and sellers know all relevant prices, technologies, and preferences.

  • No uncertainty or hidden information (no asymmetric information).

• Free entry and exit

  • Firms can freely enter or leave the market in response to profits or losses.

  • In the long run, profits → 0 (normal profit), keeping resources efficiently allocated.

• Rational behavior

  • Consumers maximize utility; producers maximize profit.

  • Decisions are made using marginal analysis: comparing small changes in cost and benefit.

• No externalities

  • All costs and benefits of production and consumption are internal to buyers and sellers.

  • No spillover effects (like pollution or ecosystem benefits) are ignored.

• No transaction costs

  • Buying and selling are frictionless (no time, transportation, or coordination costs).

• Perfect factor mobility

  • Resources (labor, capital, land) can move freely to where they are most productive.

What assumptions are dead wrong?

• Price is not influenced by power dynamics
• Buyers don't only care about price
• Information asymmetry is large
• Consumers do no maximize utility
  • Producers do maximum profits though
• There are spillover effects
• There is a transaction cost. That's why so many people buy from amazon. The time cost of going to the store vs buying online from the comfort of your own home

What does that mean about the conclusion of the market then?

What does this mean?

• Competition encourages
  • efficiency of resource usage (to reduce costs)
    • Also encourages using cheaper materials
    • Doesn't mean sustainable
  • Innovation
    • Innovation that can make more money
  • Fair price

Price adjusts naturally based on competition and consumer choices.

Competitive markets solves a problem