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Lecture17GeneralEquilibrium

Lecture17GeneralEquilibrium - Introduction to...

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1 Introduction to Microeconomics Lecture 17 General Equilibrium Simon Cowan The demand for coffee rises.. ° What happens to ° the demand for cafetieres ° the demand for tea ° land prices in Brazil and Kenya ° the wages of agricultural workers in Kenya ° the price of renting a shop on a UK high street ° the price of tea? Outline ° GE theory considers all markets together ° Here we focus on characterising the equilibrium when all markets are considered simultaneously ° Other issues: ° can we be sure that an equilibrium exists? ° If so, is it unique? ° Is it stable ? ° Is the equilibrium efficient or optimal ? ° what are the welfare properties of a general equilibrium? What is a general equilibrium? ° A general equilibrium is an allocation of goods and factors of production and a set of prices such that ° each consumer maximizes utility given their budget constraint ° Demand equals supply in each market: markets clear ° (Can allow supply to exceed demand if price is zero) ° Also called a competitive equilibrium, or a Walrasian equilibrium (after Leon Walras) Prices are chosen by an auctioneer to clear markets ° GE theory assumes the existence of an auctioneer (“a Walrasian auctioneer”) who finds the prices which clear all markets ° S/he announces a list of prices for all goods (and factors of production) ° If there are n markets then n – 1 relative prices are determined ° Agents announce their demands and supplies ° The auctioneer raises the prices of goods with aggregate excess demand and cuts prices of goods with aggregate excess supply ° Agents announce new demands and supplies Price-setting cont. ° The process continues until aggregate excess demands and supplies are zero ° Then, and only then, does actual trading take place ° Gold prices are set in London each day in this way: http://goldinfo.net/londongoldfix.html ° Can include contracts for future delivery: e.g. contract now to sell (or buy) wheat in a year’s time ° In practice the absence of a real-world auctioneer means that many markets don’t function in such an ideal way ° Macroeconomic models often assume ° (i) there is no auctioneer ° (ii) no market for future goods
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2 An exchange economy ° Two consumers (Alice and Bob), two goods (Cheese and Dates) ° No production ° Both start with given quantities – their “endowments” °
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