lect8 - General Equilibrium Intermediate Microeconomics Amy...

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General Equilibrium Intermediate Microeconomics Amy Brown University of California, Los Angeles September 3, 2008 A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 1 / 41
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Outline of Lecture 1 Construction of General Equilibrium models 2 Existence of equilibrium 3 Endowment economy with 2 goods and 2 consumers 4 Edgeworth Box analysis 5 Break 6 General Equilibrium with Production 7 E¢ ciency and Distribution 8 Externalities and Public Goods This should cover chapter 12 in the 9th edition, chapter 13 in the 10th edition A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 2 / 41
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General Equilibrium Models Partial equilibrium model is incomplete. Abstracts from other markets. Simultaneous equilibrium across markets is called general equilibrium . How can we characterize prices and quantities such that all markets clear simultaneously? A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 3 / 41
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Formulating General Equilibrium Models N consumption goods. Large numbers of consumers with preferences over consumption. Large numbers of &rms each with some technology to produce output using inputs. Ownership over goods used as inputs and pro&t created from outputs. A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 4 / 41
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Individual Behavior (Simplifying Assumptions) All goods are traded. All market participants take prices as given. Consumers maximize utility given the prices. Firms maximize pro&ts given the prices. Market prices adjust so that all markets are simultaneously in equilibrium. A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 5 / 41
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Solution Procedure for General Equilibrium Models 1 Solve utility maximization for consumers, pro&t maximization for &rms given prices to &nd the individual net supply and demand of goods. 2 Find the total market demand and supply by adding up individual demand functions and subtracting supply functions. 3 Set the net demand for each good to be equal to zero to determine market-clearing prices. A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 6 / 41
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Walras&s Law These solution procedures give you N equations in N & 1 unknowns. We ±x one price as "numeraire" for all other goods. Under general conditions, this system must have at least one solution. Market equilibrium exists. A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 7 / 41
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Simplest Endowment Economy Two consumers in the world, A and B . Two goods in the economy, x and y . Each starts out with an initial endowment of each good. No &rms, no production. The consumers must trade their endowments to &nd an optimal allocation. Graphical representation of this called the Edgeworth Box . A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 8 / 41
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Example of Endowment Economy Example Suppose you and a friend were trapped on a desert island where there were coconuts and &sh. You both would collect as many coconuts and as much &sh as possible, but you and your friend would have di/ering skills at gathering these goods. You may end up with an endowment (a collection) of goods that are not what you would optimally choose given the entire availability of coconuts and &sh. Since it±s just the two of you, you would make trades until you both were as happy as possible. (Think schoolyard lunches.) A. Brown (UCLA) Econ 11 Lecture 8 09²03²08 9 ² 41
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Graphical Representation: Edgeworth Box A. Brown (UCLA) Econ 11 Lecture 8 09/03/08 10 / 41
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lect8 - General Equilibrium Intermediate Microeconomics Amy...

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