Microeconomics I
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| Cartes-fiches | 336 |
|---|---|
| Langue | English |
| Catégorie | Economie politique |
| Niveau | Université |
| Crée / Actualisé | 28.05.2019 / 02.03.2025 |
| Lien de web |
https://card2brain.ch/box/20190528_microeconomics_i
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A competitive equilibrium is
an allocation E* and a set of prices, p1* and p2*, such that, given these prices (and given the initial endowments), each consumer is maximising his/her utility at that allocation
Competitive Equilibrium: we must have
Equilibrium is a set of prices (p1*;p2*) such that
total demand for each good equals total supply
The Algebra of Equilibrium
Net/Excess demand of consumer A for good 1
Aggregate excess demand for good 1
In equilibrium the aggregate excess demand for each good
Walras’ law states that
the value of aggregate excess demands is always 0 (at any prices), i.e
Using Walras’ Law we can show that
if demand equals supply in one market, the same must be true in the other market.
FTWE
any competitive equilibrium is Pareto efficient
Implicit assumptions of the FTWE: Each consumer knows only
his own tastes, endowment and the market prices
The FTWE tells us that
the resulting equilibrium from these independent, self-interested and decentralised actions is efficient
This is the nature of the “Invisible Hand” of Adam Smith
FTWE focuses on efficiency, not fairness
Allocation where one person owns everything is Pareto efficient
FTWE does not hold in
the presence of externalities
STWE: Can a Pareto efficient allocation be achieved as a competitive equilibrium?
Yes, if preferences are convex
