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” Total endowment of cheese:
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This note was uploaded on 04/12/2010 for the course ECON DEAM taught by Professor Vines during the Spring '10 term at Oxford University.

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Lecture17GeneralEquilibrium - Introduction to...

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