lecture 8 - LECTURE 8 GENERAL EQUILIBRIUM 1 Objective...

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1 LECTURE 8 GENERAL EQUILIBRIUM
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2 Objective Competitive markets emerged at some point in history to solve an economic problem that society faces. So far we just focus on the equilibrium of a single market but have no idea how trading arose and how such markets developed. Using the Edgeworth Box which only involves two agents help to define efficient and equilibrium trades. As the two-person economy grows in size, we will formally define a competitive equilibrium.
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3 Background Two agents: Geoffrey and Elizabeth Two good: apple and raspberry Initial possession/Endowment: Geoffrey: 8 apples and 2 raspberries Elizabeth: 2 apples and 6 raspberries Thus the whole economy holds 10 apples and 8 raspberries at the beginning.
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4 Background Question: Will they trade or not? Why? If they trade, what will be the outcome? What are the properties of the outcomes resulted from their voluntary trading process? Feasible? Rational? Efficient? Equilibrium?
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5 Edgeworth Box Feasible Trades No-trade Allocation/Endowment Geoffrey’s initial IC Elizabeth’s initial IC
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6 Edgeworth Box Feasible Trades : any allocation in the Edgeworth Box is feasible. Utility-improving/Individual Rational Trades : any allocation in the shaded, lens-shaped area between the two agents’ indifference curves going through the no-trade allocations. Efficient/Pareto-optimal Trades : a feasible allocation is efficient, or Pareto-optimal, if there does not exist another feasible allocation that makes at least one party to the trade better off and makes neither party worse off.
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7 Edgeworth Box Utility-improving/Individually Rational Trades Efficient/Pareto-optimal Trades E Marginal Condition G E MRS MRS =
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8 Edgeworth Box Solved Problem 4.1 A vegetarian and a carnivore eat at
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lecture 8 - LECTURE 8 GENERAL EQUILIBRIUM 1 Objective...

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