Pn such that all of the markets clear di p si i

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Unformatted text preview: --Spring 2001 n ∑ Px i ik = Ik i =1 7 Lecture 17 Equilibrium in Walras’ Economy • Equilibrium is a set of prices P * = (P1* , P2* ,...Pn* ) such that all of the markets clear: Di (P* ) = Si ∀ i • n excess demand equations: () Econ 11--Spring 2001 Walras’ Law • The total value of demand must equal the total value of supply in the economy. – This is true even when non-equilibrium prices hold. • Walras’ Law follows directly from summing the individual budget constraints. n n – Each person’s budget constraint is: ∑ Pi Dik (P ) = ∑ Pi S ik () EDi P * = Di P * − Si = 0 ∀ i • There are n equations with n unknowns – This means there will automatically be a solution, right? – No! Since the n equations characterizing the equilibrium are non-linear, there is no guarantee that there will be any solutions. i =1 Econ 11--Spring 2001 n 9 Lecture 17 10 • The system of demand equations identifies only n-1 relative prices, not all n absolute prices. • This means we can pick any n - 1 of the equilibrium excess demand equations, which, in principle should be able to identify all n - 1 relative prices. – I...
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This note was uploaded on 02/11/2012 for the course ECON 51 at Stanford.

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