101-2011-L11

101-2011-L11 - Econ 101 Lecture 11 A closed economy model...

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Unformatted text preview: Econ 101 Lecture 11 A closed economy model Announcements n Today we will do Chapter 5, pages 154- 175 n Next time, we will do Chapter 5, pages 175-185, and start(?) Chapter 8 Competitive Equilibrium and Pareto Optimum n Competitive Equilibrium n Pareto Optimum: it is impossible to rearrange production and reallocate goods in a way that someone is made better off and no one else is made worse off N C l C l MP MRT MRS , , = = Finding the Pareto Optimum n Introducing a fictitious character , the social planner : n The social planner is the nicest person on earth: she wants to maximize consumers’ welfare. She decides : n The firm’s production level and labor input n The consumer’s work and leisure n Pareto optimum Finding the Pareto optimum Willingness to substitute must equal technological possibility to substitute, and both must equal market possibility to substitute N C l C l MP MRT MRS , , = = § We have just proved the two “fundamental theorems of welfare economics” in our simple model Welfare Theorems 1. A competitive equilibrium is Pareto optimal (under certain conditions!) The free market interaction of self- interested consumers and firms produces an outcome that, before distributional considerations, is socially desirable: a benevolent invisible hand guides the actions of selfish agents Adam Smith (1723-1790) §...
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This note was uploaded on 12/26/2011 for the course ECON 101 taught by Professor Dumbass during the Fall '08 term at UCSB.

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101-2011-L11 - Econ 101 Lecture 11 A closed economy model...

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