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Unformatted text preview: General vs. Partial Equilibrium The Edgeworth Box The Contract Curve The Core General Equilibrium (without Production) or Exchange (Chapter 31) General vs. Partial Equilibrium The Edgeworth Box The Contract Curve The Core General Equilibrium • Events in one market have effects on other markets (spillovers) • Demand for x depends upon prices of complements, substitutes; income • Supply of x depends upon factor prices • Previously, we’ve taken these as given– doing partial equilibrium analysis • But its important to understand interdependence of markets– general equilibrium analysis Partial equilibrium analysis says that competitive markets yield efficient outcomes—is this still true in general equilibrium? General vs. Partial Equilibrium The Edgeworth Box The Contract Curve The Core General Equilibrium Our approach: • Simple environment—the entire economy • 2 kinds of goods • 2 people • Focus on exchange • Abstract away from production of new goods • Give people endowments • Specify preferences • Allow them to trade • Make predictions about behavior of utilitymaximizers • Evaluate welfare General vs. Partial Equilibrium The Edgeworth Box The Contract Curve The Core Endowment Economy • Consumers A and B ; goods 1 and 2 • Endowments: ω A = ( ω A 1 ,ω A 2 ) and ω B = ( ω B 1 ,ω B 2 ) • Example: ω A = (6 , 4) and ω B = (2 , 2) • This means total endowment of good 1 is ω A 1 + ω B 1 = 6 + 2 = 8 and of good 2 is ω A 2 + ω B 2 = 4 + 2 = 6 General vs. Partial Equilibrium The Edgeworth Box The Contract Curve The Core Allocations • Endowment represents where people start, but through trade, their allocations may change • General allocation or consumption: x A = ( x A 1 , x A 2 ) and x B = ( x B 1 , x B 2 ) • ( x A , x B ) is feasible if it uses at most the aggregate endowment: x A 1 + x B 1 ≤ ω A 1 + ω B 1 and x A 2 + x B 2 ≤ ω A 2 + ω B 2 • Helpful graphical tool: Edgeworth Box • Allows us to simply depict all feasible allocations General vs. Partial Equilibrium The Edgeworth Box The Contract Curve The Core Edgeworth Box Z A ( , ) 6 4 Z B ( , ) 2 2 O A O B 6 8 4 6 2 2 The endowment allocation The Endowment Allocation General vs. Partial EquilibriumGeneral vs....
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 Fall '08
 KILENTHONG
 Economics, Game Theory, Supply And Demand, Utility

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