chapter_16

# chapter_16 - General Equilibrium Analysis Partial...

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Chapter 16 Slide 1 General Equilibrium Analysis Partial equilibrium analysis assumes that activity in one market is independent of other markets. General equilibrium analysis determines the prices and quantity in all markets simultaneously and takes the feedback effect into account. A feedback effect is a price or quantity adjustment in one market caused by price and quantity adjustments in related markets.

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D V D M Two Interdependent Markets (Movie Tickets and Videocassette Rentals) Moving to General Equilibrium Price Number of Videos Price Number of Movie Tickets S M S V \$6.00 Q M Q V \$3.00 \$6.35 Q’ M S* M Assume the government imposes a \$1 tax on each movie ticket. Q’ V D’ V \$3.50 General Equilibrium Analysis: Increase in movie ticket prices increases demand for videos.
D V D M Two Interdependent Markets (Movie Tickets and Videocassette Rentals) Moving to General Equilibrium Price Number of Videos Price Number of Movie Tickets S M S V \$6.00 Q M Q V \$3.00 The Feedback effects continue. \$3.58 Q* V D* V \$6.35 Q’ M D* M \$6.82 Q* M S* M Q’ V D’ V \$3.50 D’ M Q” M \$6.75 The increase in the price of videos increases the demand for movies.

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Chapter 16 Slide 4 Efficiency in Exchange Exchange increases efficiency until no one can be made better off without making someone else worse off (Pareto efficiency). The Advantages of Trade Trade between two parties is mutually beneficial.
Chapter 16 Slide 5 Efficiency in Exchange Assumptions Two consumers (countries) Two goods Both people know each others preferences Exchanging goods involves zero transaction costs James & Karen have a total of 10 units of food and 6 units of clothing.

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Chapter 16 Slide 6 The Advantage of Trade James 7F, 1C -1F, +1C 6F, 2C Karen 3F, 5C +1F, -1C 4F, 4C Individual Initial Allocation Trade Final Allocation Karen’s MRS of food for clothing is 3. James’s MRS of food for clothing is 1/2. Karen and James are willing to trade: Karen trades 1C for 1F. When the MRS is not equal, there is gain from trade. The economically efficient allocation occurs when the MRS is equal.
10F 0 K 0 J 6C 10F 6C James’s Clothing Karen’s Clothing Karen’s Food James’s Food 2C 1C 5C 4C 4F 3F 7F 6F +1C -1F The allocation after trade is B: James has 6F and 2C & Karen has 4F and 4C. A

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chapter_16 - General Equilibrium Analysis Partial...

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