XIII. General equilibrium – exchange economy
- Simple model with ≠ production
XIII. a. Introduction & definitions
- Partial equilibrium analysis = determination of equilibrium price & output in
single market taking as given prices of goods in all other markets
- Case of demand shock: impact in change in demand & price of good 1 on
demand & price of good 2
- General equilibrium analysis considering all markets simultaneously & taking
feedback effect into account
- Feedback effect = price/quantity adjustment in one market caused by price &
quantity adjustments in related markets
- General equilibrium = supply equal to demand in all markets simultaneously
XIII. b. Exchange
- Pure exchange economy
o Two consumers: A , B each seeking individual utility maximization
o Two goods: good 1 & good 2
o Available quantities: 1, 2
o Endowments:
o A 's income if A selling all endowments of goods 1 & 2 in market –
monetary exchange received for endowment (= wealth):
, o B's income if B selling all endowments of goods 1 & 2 in market –
monetary exchange received for endowment (wealth):
- Edgeworth box showing all possible allocations of available quantities of goods
1 & 2 between two consumers
- Total available quantities of goods 1 & 2 = total endowment of good 1 of
consumers A & B + total endowment of good 2 of consumers A & B
- Question: feasible allocations of goods 1 & 2 all points in Edgeworth box
including borders
o Example: endowment allocation (= before-trade allocation)
- Question: allocations blocked by one/more consumers
- Adding preferences for each consumer to Edgeworth box
o Note: indifference curves ≠ sloping upwards
- Simple model with ≠ production
XIII. a. Introduction & definitions
- Partial equilibrium analysis = determination of equilibrium price & output in
single market taking as given prices of goods in all other markets
- Case of demand shock: impact in change in demand & price of good 1 on
demand & price of good 2
- General equilibrium analysis considering all markets simultaneously & taking
feedback effect into account
- Feedback effect = price/quantity adjustment in one market caused by price &
quantity adjustments in related markets
- General equilibrium = supply equal to demand in all markets simultaneously
XIII. b. Exchange
- Pure exchange economy
o Two consumers: A , B each seeking individual utility maximization
o Two goods: good 1 & good 2
o Available quantities: 1, 2
o Endowments:
o A 's income if A selling all endowments of goods 1 & 2 in market –
monetary exchange received for endowment (= wealth):
, o B's income if B selling all endowments of goods 1 & 2 in market –
monetary exchange received for endowment (wealth):
- Edgeworth box showing all possible allocations of available quantities of goods
1 & 2 between two consumers
- Total available quantities of goods 1 & 2 = total endowment of good 1 of
consumers A & B + total endowment of good 2 of consumers A & B
- Question: feasible allocations of goods 1 & 2 all points in Edgeworth box
including borders
o Example: endowment allocation (= before-trade allocation)
- Question: allocations blocked by one/more consumers
- Adding preferences for each consumer to Edgeworth box
o Note: indifference curves ≠ sloping upwards
