This preview shows pages 1–9. Sign up to view the full content.
General Equilibrium (without Production)
or
Exchange
(Chapter 31)
February 16, 2010
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document General Equilibrium
Events in one market have eﬀects on other markets (spillovers)
Demand for
x
depends upon prices of complements,
substitutes; income
Supply of
x
depends upon factor prices
Previously, we’ve taken these as given– doing
partial
equilibrium
analysis
But its important to understand interdependence of markets–
general equilibrium
analysis
Partial equilibrium analysis says that competitive markets yield
eﬃcient outcomes—is this still true in general equilibrium?
General Equilibrium
Our approach:
Simple environment—the
entire
economy
2 kinds of goods
2 people
Focus on exchange
Abstract away from production of new goods
Give people endowments
Specify preferences
Allow them to trade
Make predictions about behavior of utilitymaximizers
Evaluate welfare
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document Endowment Economy
Consumers
A
and
B
; goods 1 and 2
Endowments:
ω
A
= (
ω
A
1
,ω
A
2
) and
ω
B
= (
ω
B
1
,ω
B
2
)
Example:
ω
A
= (6
,
4) and
ω
B
= (2
,
2)
This means total endowment of good 1 is
ω
A
1
+
ω
B
1
= 6 + 2 = 8 and of good 2 is
ω
A
2
+
ω
B
2
= 4 + 2 = 6
Allocations
Endowment represents where people start, but through trade,
their allocations may change
General allocation or consumption:
x
A
= (
x
A
1
,
x
A
2
) and
x
B
= (
x
B
1
,
x
B
2
)
(
x
A
,
x
B
) is
feasible
if it uses at most the aggregate
endowment:
x
A
1
+
x
B
1
≤
ω
A
1
+
ω
B
1
and
x
A
2
+
x
B
2
≤
ω
A
2
+
ω
B
2
Helpful graphical tool: Edgeworth Box
Allows us to simply depict all feasible allocations
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document Edgeworth Box
Z
A
( , )
6 4
B
( , )
2 2
O
A
O
B
6
8
4
6
2
2
The
endowment
allocation
The Endowment Allocation
Edgeworth Box
Feasible Reallocations
O
A
O
B
Z
1
1
A
B
.
x
A
2
2
2
A
B
.
x
A
1
x
B
1
x
B
2
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
In partial equilibrium analysis:
Treat each good separately
Find
p
and
q
that equate supply and demand
But this is general equilibrium analysis: where do supply and
demand come from?
A
and
B
can trade with each other
For everything to be balanced, the amount that
A
gives up
has to equal amount that
B
receives (for each good, and vice
versa)
In other words
Supply = Demand
for each good
This will determine prices for each good
How do we ﬁnd supply and demand curves?
Go back to utility maximization problem
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 03/17/2010 for the course ECON 100B taught by Professor Kilenthong during the Spring '08 term at UCSB.
 Spring '08
 KILENTHONG

Click to edit the document details