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Part IIa: Paper 1
General Equilibrium and Welfare
Economics
Dr Sönje Reiche
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•
Uniqueness:
Will an economy have only one
equilibrium?
•
Cowell 7.4.3
•
Stability:
Will the economy somehow “tend to” or
“revert to” this equilibrium?
•
Price Determination:
And will this determine the price system
for us?
•
Cowell 7.4.4
•
Gross substitutes
( 29 ( 29 ( 29
x
s
d
x
R
p
x
p
x
p
E


≡
Excess Demand Function
(2) Only relative prices matter, so
∑
=
h
h
x
x
p
p
p
~
Prices lie between
0 and 1
(1) Walras’s Law
( 29
0
=
∑
h
h
h
p
E
p
Individuals must
satisfy their budget
constraints
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p
( 29
p
E
x
Excess supply
Excess demand
Diagram for two goods and normalised prices
1
Know excess demand for
y
through Walras’s Law
Good
x
is free
Good
y
is free
( 29
0
=
p
E
x
Assume each good is scarce, then equilibrium means
Equilibrium
Uniqueness
Given strictly monotone preferences, equilibrium requires that
( 29
0
=
p
E
x
x
p
( 29
p
E
x
Excess supply
Excess demand
1
Wellbehaved economy
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This note was uploaded on 03/07/2012 for the course ECON 201 taught by Professor Cowell during the Spring '10 term at LSE.
 Spring '10
 Cowell
 Economics

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