11 - Exchange - Market Exchange: Preliminaries Total...

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1 Good 1 Good 2 A B Total Endowment of Good 1 Total Endowment of Good 2 B 1 ω B 2 ω A 1 ω A 2 ω Market Exchange: Preliminaries ω Good 1 A B Total Endowment of Good 1 Total Endowment of Good 2 B 1 ω B 2 ω A 1 ω A 2 ω Market Exchange ± There will generally be gains from trade. ω ± A Competitive Equilibrium (or Walrasian Equilibrium) is an Allocation of goods and a price vector such that: ± Given the price vector, individuals maximize utility (subject to their budget constraint) by consuming these quantities ± Choices are consistent in the sense that markets clear (Demand=Supply in all markets) Competitive (Walrasian) Equilibrium
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2 Excess supply of good 1 2 1 p p slope = Good 1 Good 2 A B The Price Mechanism ± Each price ratio generates a budget set for each consumer. ± Each consumer comes to market with his own endowment. ± Each consumer chooses the best point in his budget set. U A X A U B X B Best choices incompatible: each consumer wants to sell Good 1. ⇒↓ 2 1 p p ω Good 1 A B The Price Mechanism ± Each price ratio generates a budget set for each consumer.
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This note was uploaded on 04/02/2008 for the course ECON 401 taught by Professor Kuhn during the Fall '08 term at University of Michigan.

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11 - Exchange - Market Exchange: Preliminaries Total...

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