lec2(3) - General Competitive Equilibrium Chapter 13 Skip...

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1 1 General Competitive Equilibrium General Competitive Equilibrium Chapter 13 Skip pages 458-462 Skip “Departing from the competitive assumptions” on pages 475 and 476 Useful Examples 13.1, 13.2, 13.4, 13.5, and 13.6 Also look over Problem 13.6 2 Simplifications Simplifications Concentrate on competitive markets Focus on two goods and two consumers – the results can be generalized Two stages : pure exchange case based on fixed endowments of goods production case where the model includes production decisions
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2 3 Equilibrium in Pure Exchange Equilibrium in Pure Exchange Examine gains from voluntary exchange and principle of economic efficiency Assumptions: two-consumers and two goods fixed endowments in goods no formal markets, so consumers barter to make exchanges all trades are mutually beneficial - no fraud or trickery - value is perceived at purchase time 4 Gains from Exchange Gains from Exchange Hank is willing to pay 5 wine for 1 steak and Monica is willing to pay 1S for 1W, so trade is mutually beneficial They bargain and exchange 3W for 1S: they are both better off Hank would have given up 5W for 1S Monica would have sold the steak for as little as 1W Endowments MRS SW Trade After Trade Hank 5W/1S -3W+1S Monica 1W/1S +3W-1S 8W & 44S
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3 5 Edgeworth Edgeworth Box: First Consider Box: First Consider Hank Hank ’ Preferences Preferences Wine Steak O H U 1 H U 2 H 6 Edgeworth Box: Now Add Monica’s Preferences Wine Steak O Hank O Monica A B U 1 H U 2 H U 1 M U 2 M U 3 M
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4 7 Features of Features of Edgeworth Edgeworth Box Box Box identifies all possible market baskets fixed endowments determine size of box points inside the box are all feasible Initial endowment puts consumers at A Wine Steak O Hank O Monica A B U 1 H U 2 H U 1 M U 2 M U 3 M 8 Why Do Consumer’s Trade? • Indifference curves cross at A, because MRS H is not equal to MRS M • Lens-shaped area is bundles where both consumers are better off than at A • Trade until MRS is equal Wine Steak O Hank O Monica A B U 1 H U 2 H U 1 M U 2 M U 3 M
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5 9 Trade and Contract Curve • At B, no trade is mutual beneficial • Tangencies are Pareto efficient: no one can be made better off without the other being worse off • Contract curve is locus of Pareto efficient allocations Wine Steak O Hank O Monica A B U 1 H U 2 H U 1 M U 2 M U 3 M 10 Distribution of Gains from Trade Distribution of Gains from Trade Incentives to trade at A, but unclear who gains most Neither will move to a lower curve than at A, so solution must be between B and C Hank prefers C and Monica prefers B, but we cannot predict the exact outcome O H O M A Contract Curve B C
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6 11 Trading and Prices Trading and Prices Extend barter framework to world with market prices Price adjustments signal consumers to move to the contract curve Barter behavior is imitated by price system if consumers are price-takers price signals lead to efficiency 12 Offer Curves Offer Curves The endowment puts consumer at E
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This note was uploaded on 05/06/2010 for the course ECON econ 101 taught by Professor Buddin during the Spring '10 term at UCLA.

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lec2(3) - General Competitive Equilibrium Chapter 13 Skip...

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