Chapter 29 Exchange Partial equilibrium and general equilibrium

Chapter 29 Exchange

Partial equilibrium and general equilibrium

Edgeworth box p 497 l. A pure exchange model of two goods, two consumers with fixed endowments w.

Region of mutual advantages. l Pareto set and the contract curve. l Bargaining for relative prices. l Gross demand x (p) , l Net or excess demand z (p) = x (p) - w (p). l

GOOD 2 x. B w. B 1 1 Person B x. A 2 x. B 2 M w A 2 Endowment Person A x. A 1 w. B 2 GOOD 1

Contract curve GOOD 2 A Pareto efficient allocation Person A’s indifference curve Person B’s indifference curve Person A Person B Endowment GOOD 1

l. From disequilibrium to the competitive equilibrium. Which good is too cheap? l. Offer curve approach. l. The existence problem of equilibrium.

Equilibrium price A’s offer curve Good 1 is Too cheap E B’s ind. curves B’s offer curve A’s ind, curves W

Chapter 30 Production

The Robinson Crusoe economy Coconuts Indifference curves C* Production function L* Labor

Production possibilities set (Two outputs case) COCNUTS SLOPE=MARGINAL RATE OF TRANSFORMATION C* PRODUCTION POSSIBILITIES SET F* FISH

C P A Trade leads to Separation of prod. and coms. (P/C), Production specialization(A P), and Wealth improvement( A C).

Heckscher-Ohlin theory on international trade, under many idealization assumptions.

l* Costs of exchange. l* Price difference between selling and buying. Fig. l* GATT and WTO.

Chapter 30 Welfare

The social preference. Two kinds of voting: majority, and rank-order.

The social welfare function. l Benthamite: W (u 1, … , u n ) = a 1 u 1 + … + a n u n. l Rawlsian: W (u 1, … , u n ) = min {u 1 , … , u n }.

Three requirements on a social decision mechanism: 1, It should be complete, reflexive, and transitive; 2, If everyone prefers X to Y, then the society should prefer X to Y; 3, The preferences between X and Y should depend only on how people rank X versus Y, and not on how they rank other alternatives.

Arrow's Impossibility Theorem l If a social decision mechanism satisfies properties 1, 2, and 3, then it must be a dictatorship: all social rankings are the rankings of one individual.