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Paper 1 Micro > general Equilibrium > Flashcards

general Equilibrium Flashcards

1
Q

Partial equilibrium

A

Studies a single market in isolation.

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2
Q

Général equilibrium

A

Takes into account all the interactions between all markets

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3
Q

Gross demand

A

Amount the person wants to consume

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4
Q

Net/excess demand

A

Amount the person wants to purchase

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5
Q

Pareto efficient allocation

A

If the 2 agents have the same MRS

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6
Q

First fundamental theorem of welfare eco

A

Compe equil allocation is Pareto efficient

proof p615最下

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7
Q

Compétitive equilibrium

A

A price pair st when each agent acts as a price taker and chooses his best bundle, both market clear

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8
Q

Contract curve

A

Line connecting Pareto efficient points ie where the MRS are equal

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9
Q

Stable equilibrium

A

Starting from some where (raise price when in excess demand and reduce price when in excess supply), the price will converge to an equilibrium

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10
Q

What is important about homogeneity of degree 0

A

Excess demands are unchanged if we multiply both prices by the same scalar
Hence Only relative prices matter

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11
Q

second theorem of welfare economics (exchange)

A

If all agents have convex preferences then there will always be a set of prices such that each Pareto efficient allocation is a market equilibrium for an appropriate assignment of endowments

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12
Q

What does contract curve tell given a particular utility level of B

A

The max u A can attain

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13
Q

PPS

A

What combinations of 2 goods can be feasibly produced

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14
Q

2 good 2 agent Pareto efficient allocation(FWT)

1 more condition

A

Production at the frontier, all produced goods are consumed, all consumers have the same MRS (on contract curve) and MRS=MRT

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15
Q

What is special about the production economy in terms of optimal and competitive equilibrium

A

The optimum and competitive equilibrium is the same

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16
Q

In a competitive equilibrium model when equilibrium is not reached the firm and consumers are choosing on the same line then why is this not Parato efficient

A

Because this is not feasible

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17
Q

Why does price have to be positive. explain in terms of the case when prices <0 or =0

A

When prize is negative from monotonic preferences Everyone will want it so nobody supplies it
If price equals zero then the goods will be in excess supply. Why excess supply? If excess demand, increase in p, so will not be in excess demand
If excess supply, then p falls, while 0 is the boundary

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18
Q

Condition for CRTS

A

0 profit, y intercept =0
Prod have infinite optimum, consumers have one, equilibrium chosen by consumer
Pareto efficient

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19
Q

Conditions for SWT in production

A

Convex preferences and convex production set, concave f( in addition to FWT
Lump sum tax feasible

20
Q

Condition for FWT

A

No ext
Price takers
Equil exists- aggregate behaviour changes continuously as prices change
Non satiation

21
Q

Why FWT holds for 2

A

MRS = price ratio : same as exchange: cons choose on budget line
MRT = price ratio
So everyone faces the same p ratio

21
Q

MRT=

A

-MPLy/MPLx

22
Q

Production externality

A

One firm’s cost/production function depends on other’s production

23
Q

Consumption externalities

A

One agents utility function depends directly on another agents consumption

24
Q

Quasilinear in coase

A

If preferences are quasi linear, the efficient amount of the good involved in the ext is independent of the distribution of property rights

25
Q

Pollution permits

A

Gov solves social cost=0
And get the quantity out of this
Get this equal to the supply
The equilibrium must be equal to this quantity
So firms have to produce here
And evaluate MC
Market price will be determined and is equal to this

26
Q

Pigou tax

A

Solve social cost=0
Get the quantity and evaluate external cost at this quantity
Set the tax
Firms will choose the quantity

27
Q

Ways to do with externalities

A

The fundamental condition is that property rights should be well-defined however well-defined property rights not necessarily lead to markets. If Property rights are well defined to allow for negotiation between people then people may trade a right to produce externalities in the same way that the they trade a right to produce a good

28
Q

Existence of a competitive equilibrium

A

Aggregate exist demand function is continuous
Each individual’s demand function is continuous- small changes in price will lead to only small changes in demand- convex preferences
Even if consumers themselves have discontinuous demand behaviour, as long as all consumers are small relative to the size of the market, agg demand function will be continuous

29
Q

Obstacles to efficient bargaining

A

Difficulty of coordinating agents affected by the externality especially if they are large numbers of them
Lack of common information about the effects of the externality or costs of reducing it(Eg one agent might think his smoking does not poses a big problem towards others so he thinks his externality is small and yet others don’t think so

30
Q

Public good

A

It has to be consumed in the same quantity by everyone-Consumption externalities
Non-rival if one persons consumption of it does not prevent other person consuming it
Nonexcludable if once the good is produced it is not possible to prevent anyone from consuming it

31
Q

Ways to provide public goods and Pareto efficiency

A

Decentralised marketplace vision is unlikely to be p effi and the good pretend to be undersupplied

Collective provision of public it may also tend to be inefficient because of the free rider prob

32
Q

Condition of pareto efficiency for a discrete public good

A

It is Parato efficient to supply a discrete public good if the sum of the consumers reservation values is a least as high as the cost of supplying it otherwise it inefficient to supply it

33
Q

Pareto efficient condition for supplying continuous public good

A

Samuelson rule: the level of supply of the public good is Pareto effi if and if and only if the sum of the consumers marginal rate of substitution between the good and any other good is equal to the marginal rate of transformation between the public good and the other good

34
Q

Why does decentralised provision fail

A

Each agent ignores the positive ext of contributing more :the extra utility for the other person
Set MRS=MRT Same as in the case of private good

35
Q

What is special about public good in quasiliner pref

A

The level of G does not depend on endow- unique efficient level

36
Q

comparison to priv goods

A

Assumption for private goods is that there is no consumption externalities. In a compe market each person optimising with respect to his own consumption was sufficient to achieve social optimum.

37
Q

What does Private solution mean in coase

A

Role of gov is limited to establishing and enforcing property entitlement to resources and enforcing freely agreed to contracts

38
Q

Price ratio in 2 good autacky

A

Prop to labour time

39
Q

Competitive equilibrium in trade

A

Wage adjusts so that profits are zero in industry two countries choose to prod
This determines the Total output of each good via complete specialisation
The output price ratio adjusts so that market clears

40
Q

Why does FWT hold in 2 output good economy

A

Given price ratio Px Py. Frim maximise profits by choosing the point on the PPF on the highest iso-profits line which has slope Px/ Py. Tangency condition MRT=Px/Py. Facing these prices, consumers choose the bundle such that the MRS= p ratio.
Hence MRSx=MRSy=MRT

41
Q

Should one increase or decrease G if sum of MRS smaller than MRT

A

Reduce G

If A wants 1/3 unit of money instead of 1G, B wants 1/2 unit of money instead of 1G, but reducing G frees up 1 money

42
Q

The explanation for Robinson-Friday economy condition for pareto efficient MRT=MRS

A

Suppose MRSr=MRSf=1 but MRT=2. Could reduce yam by 1u and get 2u of coconuts. At the same time Robinson reduces yam consumption by 1u and increases coconut consumption by 2u. Robinson strictly better and Friday unaffected

43
Q

Comparative advantage

A

In a good: means the country has a lower opportunity cost of that good than the other country does. The principle of c/a says if Which specialises in the good in which it has a comparatively exports some of that good and imports the other one, both Can become better off
Trade introduces extra production possibilities

44
Q

Absolute advantage

A

Means both goods are cheaper to produce in terms of labour requirement.
But it is not possible for one country to have a comparative advantage in both unless the PPF have the same slope

Paper 1 Micro (3 decks)

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