Term 1 week 3 Flashcards
What is the difference between partial and general equilibrium?
-Partial equilibrium looks at how demand and supply of a good is affected by price in a particular market
-General equilibrium looks at how demand and supply in different markets react to determine price of multiple goods.
What are the assumptions behind pure-exchange economies?
- No production.
-Consumers are endowed with a certain amount of consumable goods.
-Consumers have preferences over consumable bundles and only care about own utility
-Consumers either consume their own bundles or interact in barter exchange.
-Consumers act as price takers.
What is the framework of an edgeworth box?
2 consumers i = (A,B) with amounts of goods j = (1,2)
Consumer A’s endowment: wA = w1A + w2A
Consumer B’s endownment wB = w1B + w2B
Total endownment of good 1 = w1A + w1B
Total endownment of good 2 = w2A + w2B
What does an edgeworth box show?
Shows all possible allocations of quantities of good 1 and 2 between the two consumers.
What is the difference between endowment and allocation?
How are they illustrated differently?
-Endowment is what you have
-Allocation is what you intend to consume
-Endowment is w
-Allocation is x
How do you draw an edgeworth box
eg wA = (WA1, WA2)
wB= (WB1,WB2)
First you think about shape:
horizontal axis height is endowment of good 1
vertical axis height is endownment of good 2
What is an allocation in the edgeworth box?
is the assignment of a non-negative consumption vector to each consumer x = (x1,x2)
- What is a feasible allocation in the edgeworth box?
2.How does this link to supply and demand.
- What does this imply about edgeworth box?
Write this out
- if the sum of consumption of that good between both consumers is less than or equaled to the total endownment of that good.
X1A + X1B less than or equaled to W1
- The total endowment is the supply
The total allocation is the demand
X1A + X1B = W1A + W1B
X2A + X2B = W1B + W2B
- There is no wastage in the edgeworth box.
Graphically what are feasible allocations in the edgeworth box?
Any point inside the box or on the boundary is feasible.
For well behave strictly convex preferences how do you present the indifference curves in edgeworth box?
For consumer A it is a normal downward sloping indifference curve, but for consumer 2 it must be flipped.
What is a pareto efficient point in an edgeworth box
-A point where it is impossible to make anyone better off
-A point where it is not possible to make someone strictly better off without making someone worse off
-An allocation where all gains of trade have been exhausted.
-A point where there are no mutually advantageous trades to be made.
What is a graphically way to see pareto optimality in edgeworth box?
How do you check for pareto improving points?
-If you see two indifference curves and there is an empty area inside. This empty area has pareto improving points
-You must fix one of the IC and see if you can make the person better off.
How is it possible for 2 people in an edgeworth box to improve their welfare?
Through trade
The person with more of good 1 trades with the person who has more of good 2.
Or if person A has more of both goods they have a preference between both goods.
At what point can no further pareto improvements be made?
When the two indifference curves are tangent and the MRS are the same.
As if you hold one of the IC constant you cannot make someone better off without making them worse off.
How do we draw the endowment point on an edgeworth box?
Bottom left hand corner is origin A
Top right hand corner is origin B
