MGEC02-8.pptx - MGEC02 u2013 Lecture 8 General Equilibrium...

This preview shows page 1 - 7 out of 21 pages.

1MGEC02 – Lecture 8General EquilibriumAta Mazaheri
2OUTLINEGeneral Equilibrium AnalysisEfficiency in ExchangeEquity and EfficiencyEfficiency in ProductionThe Gains from Free TradeAn Overview—The Efficiency of Competitive MarketsWhy Markets Fail
3GENERAL EQUILIBRIUM ANALYSISpartial equilibrium analysis Determination of equilibrium prices and quantities in a market independent of effects from other markets.general equilibrium analysis Simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account.
4GENERAL EQUILIBRIUM ANALYSISWhen markets are interdependent, the prices of all products must be simultaneously determined. Here a tax on movie tickets shifts the supply of movies upward from SMto S*M, as shown in (a). Higher price of movie tickets ($6.35 rather than $6.00) => shifts the demand for DVDs upward (from DVto DV), => the price of DVDs rises (from $3.00 to $3.50), as shown in (b).Two Interdependent Markets—Moving to General Equilibrium
5GENERAL EQUILIBRIUM ANALYSISThe higher video price feeds back into the movie ticket market, causing demand to shift from DMto DMand the price of movies to increase from $6.35 to $6.75. This continues until a general equilibrium is reached, as shown at the intersection of D*Mand S*Min (a), with a movie ticket of $6.82, and the intersection of D*Vand SVin (b), with a DVD price of $3.58.Two Interdependent Markets—Moving to General Equilibrium
6GENERAL EQUILIBRIUM ANALYSISReaching General EquilibriumTo find the general equilibrium prices (and quantities) in practice, we must simultaneously find two prices that equate quantity demanded and quantity supplied in all related markets.For our two markets, we need to find the solution to four equations (supply of movie tickets, demand for movie tickets, supply of DVDs, and demand for DVDs).

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture