[4] General Equilibrium Flashcards
General Equilibrium refers to a situation where ..
what goes on in one market …
EG?
all markets clear simultaneously.
…can affect other markets.
The demand for shoes can affect the demand for shoemakers, and hence for certain types of labour in general. This feeds back into the demand for shoes.
on various simplifying assumptions, What did ARROW and DEBREU results show?
They have shown that under some circumstances a perfectly competitive free market general equilibrium will be PARETO OPTIMAL.
On the other side of the coin, it is also possible to show that if any one market is missing or ‘distorted’ by __, quantity constraints or ___ competition, intervention in ANY other market MAY potentially ___welfare.
This is the theorem of the ___ ___ (Lipsey and Lancaster).
tax
imperfect
improve
SECOND BEST
What is a pure exchange economy?
How many people ?
How many goods?
where there is just a single market.
We assume there are just two people, A and B, and just two goods, 1 and 2.
There is no money – the goods are just bartered. The price P is the number of units of 1 people will swap for 2.
The two goods are not produced, but available in__ __ ET1 and ET2.
When are the markets said to clear?
The market for good 1 clears when
__ + __ = __ + __
Similarly for good 2.
fixed endowments
A market is said to clear when total demand equals total endowments.
DA1 + DB1 = EA1 + EB1
What does the edgeworth box show?
It can be done using either __ or ___
What does the Vertical and Horizontal length equal?
The further away from the bottom LH corner, the higher is A’s ___
We can use this box to illustrate how resources in the economy are divided
Consumption or endowments
ET1 and ET2
Utility
What is a contract curve?
How do you draw it?
What is the Core?
If presented With an Ultimatum of Accepting any Point on the Core, compared to Staying at E, What would they choose?
Link every Possible Competitive Outcome - the contract curve is the set of points representing final allocations of two goods between two people that could occur as a result of mutually beneficial trading between those people given their initial allocations of the goods. Draw by connecting points where the budget lines meet the indifference curves.
THE CORE is the section of the contract curve which gives both consumers Higher utility than at the initial endowment point E.
Choose the Core
The core is the area __ over by The __.If there is just one consumer On one side (say on side B) but Lots on the other side A, then Who is in a stronger Bargaining position?
If there was just one Consumer B, then where would be the outcome?
With lots of consumers On both sides, the Bargaining process Converges on the__ ___, D.
bargained, consumers
Side B with One
Outcome would be on the contract curve, closer to the bottom left hand corner of A (higher U for B)
Competitive equilibrium
What is the Price Elasticity of Substitution?
The elasticity of substitution is a measure of the rate at which relative demands for different goods change when the ratio of prices changes
So if P changes from 1 to 1.5
dLn(P) =
If D1 changes from 1 to 1.2 and D2 changes from….
(D1/D2) changes from 1 to 1.5
dLn(D1/D2) =
So the elasticity of substitution =
dLn(P)=ln(1.5)-ln(1)=0.405
D2 changes from 1 to 0.8
dLn(D1/D2)=ln(1.5)-ln(1)=0.405.
So the elasticity of substitution = 0.405/0.405=1
