lecture17 - Prof Jay Bhattacharya Econ 11-Spring 2001...

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Prof. Jay Bhattacharya Econ 11--Spring 2001 Lecture 17 1 Lecture 17 Econ 11--Spring 2001 1 Welfare Properties of Market Outcomes • Last time, we covered equilibrium in one market—partial equilibrium. • We found that under perfect competition, the equilibrium price and quantity maximized the sum of producer and consumer surplus. • In an exchange economy, we found that trade at the equilibrium market price led automatically to Pareto optimal outcomes (on the contract curve). • The next two lectures will ask whether these nice welfare properties hold in general equilibrium under perfect competition. Lecture 17 Econ 11--Spring 2001 2 The Complexity of General Equilibrium In partial equilibrium analysis, there is a clean and sharp theoretical distinction between producers and consumers. In general equilibrium, one person may participate simultaneously in many different markets. – Sometimes as a consumer – Sometimes as a producer There are billions of people in the economy. Outcomes in one market affect outcomes in countless other markets. What is needed is some mechanism to concisely convey to everyone information about everyone else’s needs and about the difficulty in fulfilling them. Lecture 17 Econ 11--Spring 2001 3 The Role of Market Prices • The role of prices is to convey signals to every participant about relative scarcity in all markets simultaneously. • We will see that under competitive conditions, market prices succinctly convey all necessary information about an unimaginably complicated reality so that all markets are in equilibrium simultaneously. Lecture 17 Econ 11--Spring 2001 4 Competitive Equilibrium • Consumers, taking prices as given, choose consumption goods and supply inputs (capital, labor) to firms to maximize utility. • Producers, taking prices as given, buy inputs from consumers and make consumption goods to maximize profits. • Consumers own firms and collect any profits based on how many shares they own. • In competitive equilibrium, all input and output markets clear and firms make zero profits. Lecture 17 Econ 11--Spring 2001 5 Contingent Commodities and Futures • Contingent commodities are goods that are delivered depending upon the state of the world. – Fire insurance pays if there is a fire. – Bets against the Lakers must be paid when they win. • Futures are commodities that are delivered at some future time for a price paid today. – Cattle futures – Organ futures • Economists have constructed proofs that show that general equilibrium exists even when contingent and futures markets are allowed.
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lecture17 - Prof Jay Bhattacharya Econ 11-Spring 2001...

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