The Concept of Economic Efficiency 19 



petitive. That is, there is a relatively large number of buyers and 

 sellers on each side of every market. The exact number is not 

 relevant so long as no buyer or seller is so large that his purchase 

 or sale will effect the price of the product or factor which he 

 exchanges. Hence, every buyer or seller is a "price taker"; he 

 accepts the price which prevails in the market and organizes his 

 economic activities in response to market prices. 



THE PRODUCT MARKET 



It is a basic postulate that institutions in a democratic com- 

 munity exist for the individual. Beginning with the individual 

 then, how do we define maximum satisfaction for the consumer? 

 There are three elements to the problem: (a) the consumer's 

 preferences, (b) his consumption budget, and (c) the prices which 

 prevail in the product market. 



To simplify the exposition of consumer preferences, consider a 

 case where there are only two commodities on which the consumer 

 will spend his entire budget. In this instance, his preference is 

 measured in terms of his relative valuation of two commodities. 

 Take, for example, a given combination of commodities A and B 

 which will provide a level of satisfaction shown by point h on the 

 line Iq of Figure 1. Line Iq is so drawn as to reveal all of the 

 possible combinations of A and B which would provide the same 

 level of satisfaction, and is therefore referred to as an "indifference 

 curve." So far as his satisfaction is concerned, the consumer will 

 be indifferent as to which of the possible alternative combinations 

 is provided. This curve, in effect, represents the consumer's valua- 

 tion of one commodity in terms of the other, and reflects varying 

 amounts of one commodity which must be substituted for the other 

 at different points along the curve to maintain the same level of 

 satisfaction. The rate at which a consumer can substitute small 

 quantities of one commodity for another while maintaining the 

 same level of satisfaction is referred to as his marginal rate of 

 substitution between the commodities. 



Corresponding to Iq there will be other indifference curves, such 

 as Ij, I2, and so on, each depicting combinations of the two com- 

 modities which would leave the consumer at a constant level of 

 satisfaction. These successive curves represent higher levels of 

 satisfaction, consistent with the proposition that a greater quantity 



