GWLecture1M - Part IIa: Paper 1 General Equilibrium and...

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Unformatted text preview: Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Marco van der Leij Lecture 1M 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 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 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 Robinson Crusoe Model 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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GWLecture1M - Part IIa: Paper 1 General Equilibrium and...

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