Lecture 25 handout - General equilibrium

Lecture 25 handout - General equilibrium -...

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Perfect Competition, General Equilibrium, and Social Welfare Handout Assumptions of perfect competition: 1. Many buyers and sellers 2. Homogeneous output 3. No external effects 4. Perfect information 5. Individuals act in their own best interest If an assumption of perfect competition is violated, we say there is a market failure (or market friction ). ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Partial equilibrium: The equilibrium of supply and demand in a single market. General equilibrium: The equilibrium of supply and demand in all markets simultaneously. 1 st Fundamental Theorem of Welfare Economics : Under the assumptions of perfect competition, the general equilibrium is Pareto efficient. 2 nd Fundamental Theorem of Welfare Economics : Under certain conditions including perfect competition, every Pareto efficient allocation can be achieved as the general equilibrium by an appropriate lump sum redistribution of the initial endowment. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Individual
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