Chapter 17 Flashcards
Definition of General equilibrium analysis:
The study of how conditions in each market in a set of related markets affect equilibrium outcomes in other markets in that set
Def of initial endowment
The resources of assets that an individual firm or country possesses before trading exchange or production occurs
Edgeworth exchange box
A diagram used to analyse the general equilibrium of an exchange economy
Def of pareto superior (or pareto preferred)
An allocation that at least one individual prefers and others like at least as well
Def of Pareto optimal
The term used to describe situations in which it is impossible to make one person better off without making at least some others worse off
What’s a contract curve ???
A contract curve yung padawon is a curve along which all final voluntary contracts must lie
The theorem of the invisible hand can be stated as follows…
An equilibrium produced by competitive markets will exhaust all possible gains from exchange
The second theorem of welfare economics states
Any allocation on the contract curve can be sustained as a competitive equilibrium
What’s a edgeworth production box???
Same as the edgeworth consumption except with the context of production
Whaza production possibilities frontier???
The set of all possible output combinations that can be produced with a given endowment of factor inputs
Def Marginal rate of transformation (MRT)
the rate at which one output can be exchange for another at a point along the production possibilities frontier
(the slope of the production possibilities frontier at any point)
MRT = MC_A / MC_B (Marginal cost of output A and of output B)
What is the effect of tax on product mix
(General equilibrium)
raises the relative price ratio
What are consumption decisions and production decisions based on???
Gross prices and net prices respectively
In order for an economy to be efficient in terms of product mix…
…it is necessary that the marginal rate of substitution for every consumer must be equal to the marginal rate of transformation
State the 1st welfare theorem of Economics
An economy in a **competitive general equilibrium will
,under certain conditions,
Be simultaneously efficient (Pareto optimal) in consumption, in production AND in the choice of product mix.
