Comparative_Advantage__Lesson_10_

Comparative_Advantage__Lesson_10_ - General Equilibrium...

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1 Lesson 10 1 General Equilibrium Supply and Demand In this lesson, we show how to use the information in the PPF to draw a general- equilibrium supply curve for the economy We show how the quantity supplied of a particular good depends on its relative price The concept of general equilibrium recognizes that markets are intertwined. Producing more of one good necessarily implies producing less of some other good. Lesson 10 2 Walras’ Law Before drawing pictures, think about one way in which markets are connected. Assume two goods ( X = bread, Y = cheese) X D X for demand = Y D Y for demand = X S X of supply = Y S Y of supply = X P X of price = Y P Y of price = Lesson 10 3 For the entire economy, all income is earned by producing and selling the two goods: Y Y X X S P S P + = Income Total For the entire economy, all spending falls on the two goods: Y Y X X D P D P + = Spending Total
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2 Lesson 10 4 For simplicity, suppose that all income is spent (i.e., there is no net saving or borrowing in this economy). Then: Spending Total Income
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Comparative_Advantage__Lesson_10_ - General Equilibrium...

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