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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 11Spring 2001 Walras’ Law
• The total value of demand must equal the total value of
supply in the economy.
– This is true even when nonequilibrium 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 nonlinear, there is no guarantee that
there will be any solutions. i =1 Econ 11Spring 2001 n 9 Lecture 17 10 • The system of demand equations identifies
only n1 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.
 '07
 Tendall,M
 Perfect Competition

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