ACCPT3- General Equilibrium Flashcards
Is our analysis of general equilibrium under the assumption of perfect competition?
Yes
Which 3 different kinds of economy are we going to be looking at?
- Pure exchange economy
- Pure production economy
- A production and exchange economy
What is Pareto improvement and how can this be seen on a graph?
- A Pareto improvement would be making at least one person better off, without making another person worse off.
- On a graph this would be any area above or to the right of a Pareto inefficient outcome.
What is Pareto efficiency and how can this be seen on a graph?
- Pareto efficiency is when there are no more Pareto improvements available; there is no way to make one person better off without making another person worse off
- On a graph, the point would already be on its PPF line.
What does the Edgeworth box illustrate? List 5
- 2 goods: x and y
- 2 consumers A and B
- With endowment (xA,yA ) and (xB,yB), respectively
- Each has preferences represented by the indifference curves which for each individual are convex to their respective origin
- Consumers maximise utility and are allowed to trade their endowments with each other as price takers
In the Edgeworth box, what are the slopes of the indifference curves for individuals A and B
- Individual A’s indifference curve has a slope of -MRSaxy
* Individual B’s indifference curve has a slope of -MRSbyx
In the Edgeworth box, at which points are no further Pareto improvements possible, and how can this be written?
- No further Pareto improvements can be made at the point where both individual’s indifference curves are tangential to eachother
- MRSaxy = MRSbxy = MRS ixy (i = A,B)
- This is the Pareto efficient outcome.
What is MRSaxy and MRSbxy also equal to at the Pareto efficient outcome?
-Px/Py
MRSaxy = MRSbxy = -Px/Py is also known as what?
Consumption efficiency
What is the line joining all the Pareto efficient and Consumption Efficient points between A and B called?
The contract curve.
What is another way of drawing this contract curve?
As a Utility Possibility Frontier
What does the story in a Pure Production Economy show? List 5
- Two goods x and y
- Each produced by a different firm (labelled the same as the good they produce)
- Each firm has an endowment of inputs labour and capital
- Firms have isoquants that are convex to their respective origins, y and x,
- Firms are price takers but can trade inputs
All points on the Production Economy contract curve are what? And how can this be written?
- They are all production efficient
- They are also all Pareto efficient
- MRTSxlk= MRTSylk = w/r = MRTSilk (i = x,y)
What does w/r stand for?
The wage rental ratio
What else does MRTxlk= MRTSylk = w/r =?
Minus the slope of the isoquants
