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Unformatted text preview: Lecture Notes Econ 702 Spring 2004 1 Jan 27 What is an equilibrium? An equilibrium is a statement about what the outcome of an economy is. Tells us what happens in an economy . An equilibrium is a mapping from environment (preference, technology, information, market structure) to allocations where, 1. Agents maximize 2. Agents actions are compatible. One of the important questions is, given the environment what type of equilibria we should look at. The economist doesnt have the right to choose what happens. For example, for an economy with two people it might not be appropriate to think of ArrowDebreu (maybe they are not price takers, they might not behave competitively). In order something to be predictable by theory it needs to exist and be unique. For this reason, existence and uniqueness are properties that we want the equilibrium to have. Optimality is a property of an allocation. An equilibrium allocation might or might not have this property. In this class, we will go over some of the popular notions of equilibrium in macroeco nomics that might be different from Walrasian equilibrium. 1 1.1 Valuation Equilibrium In macroeconomics, we are interested in infinite dimensional commodity spaces. We want to look at the relationship between competitive equilibrium and Pareto optimal ity in models with infinitedimensional spaces. You looked at competitive equilibrium and Pareto optimality in 701, but the proofs of the FBWT and SBWT were done in the context of finitedimensional commodity spaces. Here we want to show that the welfare theorems hold for economies with infinite dimensional spaces. To do this, we introduce the equilibrium concept valuation equilibrium. Before defining valuation equilibrium, we first need to define the environment: 1. L , Commodity space: L is a topological vector space. Definition 1 (Vector Space) A vector space is a space where the operations addition and scalar multiplication are defined, and where the space is closed under these two operations. i.e. If we take two sequences a = { a i } L and b = { b i } L , it must be that a + b L . And if we take k R + ,k > , it must be that a L d = ka L k > . Definition 2 (Topological Vector Space) A topological vector space is a vector space which is endowed with a topology such that the maps ( x,y ) x + y and ( ,x ) x are continuous. So we have to show the continuity of the vector operations addition and scalar multiplication. 2. X L , Consumption Possibility Set: Specification of the things that people could do (that are feasible to them). X con tains every (individually) technologically feasible consumption point....
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