Economics 3
02
for all inputs and firms
MRTSF=MRTSG
for consumption and production
MRS = MRT
Contrast between Planning and Market approaches
A. Planning: Assume a beneficent dictator who is omnipotent and omniscient.
What approach would he use? Answer: Find the ParetoOptimal (Efficient)
frontier of the Utility Possibility Set. This frontier is also traced out by
maximising A's utility while keeping B's utility fixed.
2.
Two Fundamental Theorems of Welfare Economics First Theorem: Every
Competitive Equilibrium is Paretoefficient.
Second Theorem: With convexity, every Paretoefficient point can be enacted
as a competitive equilibrium.
3.
4
.
Marginal conditions for Paretoefficiency (optimality)
MRSA = MRSB
for all pairs of good and individuals.
Salim Rashid
1.
5

6
.
Why General Equilibrium?
A.
Partial Equilibrium ignores interactions, especially price and income
effects.
In Macroeconomics, effects of a capital tax.
In CB Analysis, effects of a dam, or railroads, etc.cumulative or
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 Spring '08
 TOOSSI
 Economics, Macroeconomics, competitive equilibrium, PARETO OPTIMALITY, Salim Rashid, Welfare Economics First, A. Partial Equilibrium

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