2. Achievement of the market system Flashcards
Is there production in an exchange economy?
No
What is the impact of productivity on welfare allocation?
Productivity increase impacts welfare allocation
General competitive equilibrium (GCE)
- Described by a vector of prices and a consumption bundle for each consumer (allocation) such that:
- Every consumer maximises utility given prices (Derivative = 0), and
- Market clears: The ttoal demand for each commodiit just eqals the aggreaget endowment (Demand = Supply)
What are the dimensions of the box?
Supply
Non satiation
Consumers enjoy more consumption, no maximum
General equilibrium in a competitive exchange economy
Solving for the GCE in an endowment economy
What if there are many consumers of different types
What is the Lagrangian optimisation?
How do the Lagrangian optimisation
Step by step of GCE in an exchange economy
Example: Step 1 write down the budget constraint for each consumer
EXAMPLE
Step 2: Write down each consumer’s constrained optimisation problem
EXAMPLE
Step 3: Use the Lagrangian method to find consumer demands
Anna
EXAMPLE
Step 3: Use the Lagrangian method to find consumer demands
Bilab
EXAMPLE
Step 4: Solve the market clearing condition(s) to find GCE price(s).
EXAMPLE
Step 4: Solve the market clearing condition(s) to find GCE price(s).
• Let’s confirm Walras Law by examining the market for good 𝑌
EXAMPLE
Step 5: Find the GCE allocation
EXAMPLE
Edgeworth Box
EXAMPLE
Step 6: Find consumer welfare at the GCE
EXAMPLE
GCE value
What if there is no GCE equilibrium?
EXAMPLE
What if there are no prices at which demand equals supply in every market?
Will a GCE exist?
• Condition for existence
First fundamental welfare theorm
Policy implications of the first welfare theorem
The second fundamental welfare theorem
Policy implications of the second welfare theorem
Why is convexity important?
Can equity and efficiency be separated in practice?
Endogenous Edgeworth Box
Price changes = Changes in the dimension of the box
Production can vary in response to prices.
The distribution of ‘talent’
Investing labour income
The distribution of ‘talent’
How much do labourers earn?
The distribution of ‘talent’
Production of goods
Consumption and labour supply
CONSUMPTION AND LABOUR SUPPLY EXAMPLE:
CONSUMPTION AND LABOUR SUPPLY EXAMPLE:
Step 1: write down the budget constraint for each consumer
CONSUMPTION AND LABOUR SUPPLY EXAMPLE:
Step 2: Write down each consumer’s constrained optimisation problem
CONSUMPTION AND LABOUR SUPPLY EXAMPLE:
Step 3: Use the Lagrangian method to find consumer demands
ANNA
CONSUMPTION AND LABOUR SUPPLY EXAMPLE:
Step 3: Use the Lagrangian method to find consumer demands
BILAL
CONSUMPTION AND LABOUR SUPPLY EXAMPLE:
Step 4: Solve the market clearing condition(s) to find GCE price(s).
CONSUMPTION AND LABOUR SUPPLY EXAMPLE:
Step 5: Find the GCE allocation
Summarise how consumer spending habits changed in the UK during the pandemic. How have they evolved since the lifting of restrictions?
(ONS, 2021)
- Clothing, electrical housing appliances, sports equiptment, games and toys which are still being bought online more with the lifting of restrictions
- Inflation and cost of living has reduced the amount of food people are buying
- Online internet sales in May 2022 is 26.6% but in February 2020 it was 19.7%
- Switching to cashless transactions
- People took up hobbies so there were more purchases of things like gardening items and pets
Is it plausible to think that there will be a reversion back to the pre-pandemic shopping habits? If not, why not?
(ONS, 2021)
- Shifiting towards shopping in store despite online shopping remaining high
