PAM200Lecture17 - PAM 200 Lecture 17 Agenda Notion of...

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    PAM 200  Lecture 17 Agenda Notion of General Equilibrium Pareto Efficiency Interactions Between Consumers Edgeworth Box The Contract Curve The Role of Prices
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    General Equilibrium and  Economic Welfare Here look at interactions between  markets and consumers  When we just look at one market or one  consumer that is  partial equilibrium  analysis   When we look at the interactions that is  general equilibrium analysis
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    Pareto Efficiency Key notion:  Pareto efficiency . (Recall notion  of allocative efficiency: MB=MC, which is  maximizing social welfare)  An allocation of resources is Pareto efficient if  no one can be made better off without  someone else being made worse off  That is, any reallocation would make  at least  one person worse off
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    Interactions Between  Consumers Consider interactions between  consumers: Assume : There are only 2 consumers, Sue and Bob There are 2 goods, apples and lemons
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    Interactions Between  Consumers Each consumer is endowed with a certain amount  of each good, and cannot get more of either (a  “pure exchange economy”) Sue and Bob can trade with each other at zero  cost Both have normal ICs (convex, etc.) There is no interdependence between their utilities  That is, one person’s utility does not affect the  other’s utility
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    Interactions Between  Consumers Define: q AS  = quantity of apples for Sue q LS  = quantity of lemons for Sue q AB  = quantity of apples for Bob q LB  = quantity of lemons for Bob
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PAM200Lecture17 - PAM 200 Lecture 17 Agenda Notion of...

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