10.3 Competitive Exchange

Most trading throughout the world occurs without one-on-one bargaining between people. When you go to the store for a bottle of shampoo, you check its price and decide whether to buy it. You’ve probably never tried to bargain with the store clerk over the price of shampoo: You’re a price taker in the shampoo market.

If we don’t know much about how Jane and Denise bargain, all we can say is that they will trade to some allocation on the contract curve. However, if we know the exact trading process they use, we can apply that process to determine the final allocation. In particular, we can examine the competitive trading process to determine the competitive equilibrium in a pure exchange economy.

In Chapter 9, we used ...

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