Again they must be corrected for the fact that that there are more than two commodities, producers and consumers. In figure 3, X and Y may be considered as bundles of commodities and services. Unfortunately, we need a few more assumptions in order to aggregate the utility functions into community indifference curves. The utility functions are homogeneous. The utility functions are identical or the distribution of income is fixed.
Fat curve is the so-called production possibility curve.
The perfect market economy model introduces the concepts of utility maximization, general equilibrium, substitution at the margin and the concept of social and private efficiency. The model is both socially- and privately efficient because all imperfections are assumed away. The model demonstrates that what is good for consumers and producers are also good for society. Copyright 1997-2001, Mathiesen. Reproduced with permission of the copyright owner.