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Perloff_397614_IM_Ch10 - Chapter 10 General Equilibrium and...

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Chapter 10 General Equilibrium and Economic Welfare Chapter Outline 10.1 General Equilibrium Competitive Equilibrium in Two Interrelated Markets Minimum Wages with Incomplete Coverage 10.2 General-Equilibrium Exchange Economy: Trading Between Two People Endowments Mutually Beneficial Trades Deriving the Contract Curve Bargaining Ability 10.3 Competitive Exchange Competitive Equilibrium The Efficiency of Competition Obtaining Any Efficient Allocation Using Competition 10.4 Production and Trading Comparative Advantage Efficient Product Mix Competition 10.5 Efficiency and Equity Role of the Government Efficiency Equity Efficiency Versus Equity Theory of the Second Best Teaching Tips The material in Chapter 10 on general equilibrium and the basic welfare theorems concludes the study of competitive markets. Although you may not have time to cover this chapter in depth, you might examine the topic of general equilibrium using supply-and-demand analysis to discuss how changes in one market lead to changes in another, and then talk about the welfare theorems at the intuitive level.
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Chapter 10 General Equilibrium and Economic Welfare 135 Using simple supply-and-demand format, you can introduce the comparison between partial equilibrium and general equilibrium. The concept is not difficult, and students should catch on quickly to the idea of spillover effects. You might choose an event such as the outbreak in the chicken population of “bird flu” in China that resulted in a temporary ban on the importation of chickens to Hong Kong from Mainland China (a similar event was the mad cow disease scare in Europe). Ask the class to determine which other markets would be affected. The class will likely be able to come up with some of the obvious answers, such as the beef and pork markets. They may not think of other kinds of related markets beyond substitutes, such as input markets and complement good markets. By showing these changes with supply-and-demand graphs, you can also introduce the concept of the partial equilibrium bias. When discussing welfare, the text emphasizes the efficiency of competitive equilibria. The first and second theorems of welfare economics make a good deal of intuitive sense, and can be presented with or without the Edgeworth diagrams. As the discussion is extended to include production, remind the class that competitive firms must price at marginal cost, which helps keep the focus on efficiency. By doing so, you can refer back to this discussion while presenting the monopoly model and other structures where competitive efficiency is typically compromised. The material in Section 10.4 on production and trade is a great place to bring in examples that are international in scope. Gains from trade is a very simple concept that students take for granted, and thus do not always grasp as well as they should. You may want to discuss comparative advantage at a very broad level in the context of trading between regions. For example, South America has a very large endowment of natural resources, such as lumber and minerals, but has less high technology resources compared to the Far East.
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