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GWLecture2 - Part IIa Paper 1 General Equilibrium and...

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Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje Reiche
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Outline Robinson Crusoe Model Social optimal outcome Competitive equilibrium Books: Cowell Ch 6.3, Varian Ch 32 Model of Exchange: Edgeworth Box Analysis Books: Cowell Ch. 7.2.3-7.3.2 Varian Ch 31-31.7
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Idea of Competitive Equilibrium General Equilibrium when all individuals and firms are price-takers Two conditions must be satisfied: (1) Optimality : consumers are maximising utility and producers are maximising profits given prices (2) Feasibility: demand must equal supply in all markets, markets clear A Competitive Equilibrium is a set of prices and a set of choices which satisfy these conditions
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Robinson Crusoe Model
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Robinson Crusoe Model One individual on an island who both “consumes” and “produces”. Simplest model because only one consumer and one producer. As a consumer : consumes leisure and eats coconuts As a producer: uses labour to produce coconuts with some given technology Distinguish Social Optimum from Competitive Equilibrium Recognises interdependence between consumption and production choices, and maximises social welfare.
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