General Equilibrium and Welfare Economics Flashcards
Partial Equilibrium
Looks at one market at a time in isolation
General Equilbrium
Looks at all markets together, and how they are interconnected. Everything is endogenous
Market clearing
demand=supply
Solving a simple general equilibrium model
- Define the allocation
- Feasible allocation to be pareto optimal iff there is does not exist another feasible allocation
- Form the social planner problem (max utility s.t. the constraints)
- Form the Lagrangian
- Derive the first order conditions.
Marginal Product of Labour
δG/δL
Marginal Product of Capital
δH/δK
Marginal Technical Rate of Substitution
δG/La / δG/δKa
Slope of isoquant of production
Production Efficiency
MTRSa=MTRSb
Marginal Utility of A1 for person 1
δU1/δA1
Marginal Utility of A2 for person 2
δU2/δA2
Marginal Utility of B1 for person 1
δU1/δB1
Marginal Utility of B2 for person 2
δU2/δB2
Marginal rate of Substitution for person 1
Marginal Utility of A1/Marginal Utility of B1
Consumption efficiency
MRS1=MRS2
Overal efficiency
Brings together the production side and consumer side.
MRS = MRT