term 2 - lecture 12 - general equillibrium

Question 1

what is partial equillibrium?

Answer 1

partial equillibrium analysis studies determination of equillibrium price and output in a single market, taking as given prices in all other markets

Question 2

what is general equillibrium?

Answer 2

general equillibrium analysis considers all markets simultaneously and takes feedback effect into account

Question 3

what is feedback effect?

Answer 3

a price or quantity adjustment in one market caused by price and quantity adjustments in related markets

Question 4

what is an edgeworth box?

Answer 4

an edgeworth box shows all possible allocations of the available quantities of goods 1 and 2 between the two consumers

Question 5

what are the dimensions of the box?

Answer 5

the dimensions of the box are the total quanitites available of the two goods

Question 6

what is a pareto improving allocation?

Answer 6

an allocation of the endowment that improves the welfare of a consumer without reducing the welfare of another is an pareto improving allocation

Question 7

what is the set of pareto improving allocation?

Answer 7

inbetween the two consumers indifference curves

Question 8

how does trade improve both A and Bs welfares?

Answer 8

trade shifts out the indifference curves meaning the new intersection between A and Bs indifference curves are pareto improvement over the inital endowment

Question 9

what is the most trade can improve the welfare of both invidividuals?

Answer 9

when the two consumers indifference curves are tangential then trade has maximised the welfare of both individuals and is pareto efficient

Question 10

what is a contract curve?

Answer 10

the line that joins the set of all pareto optimal allocations. the set of points where the traders indifference curves are tangent. MRSa=MRSb

Question 11

what is walrus law

Answer 11

total market value fo excess demands is zero for any positive price p1 and p2
p_1[x_1^A* +x_1^B* - w1^A +w1^B)] +p2[x2^A* +x2^B* - (w2^A + w2^B)] = 0

Question 12

what is the implications of walrus’ law?

Answer 12

if all markets but one are cleared then the remaining market must also be cleared
2) if one market is not in equillibrium, then some other markets must be in disequillibrium

Question 13

what is the first fundamental theorem of welfare economics>

Answer 13

every walrasian (competitive) equillibrium allocation is pareto efficient

Question 14

what is the second fundamental theorem of welfare economics>

Answer 14

any pareto optimal allocation ie any point on the contract curve, can be achieved by trading in competitive markets, provided that endowments are first appropiately rearranged among the consumers