Microeconomics I partie 1/9
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| Cartes-fiches | 40 |
|---|---|
| Langue | English |
| Catégorie | Economie politique |
| Niveau | Université |
| Crée / Actualisé | 31.05.2019 / 02.10.2023 |
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STWE: Can a Pareto efficient allocation be achieved as a competitive equilibrium?
Yes, if preferences are convex
FTWE does not hold in
the presence of externalities
FTWE focuses on efficiency, not fairness
Allocation where one person owns everything is Pareto efficient
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
Implicit assumptions of the FTWE: Each consumer knows only
his own tastes, endowment and the market prices
FTWE
any competitive equilibrium is Pareto efficient
Using Walras’ Law we can show that
if demand equals supply in one market, the same must be true in the other market.
Walras’ law states that
the value of aggregate excess demands is always 0 (at any prices), i.e
In equilibrium the aggregate excess demand for each good
Aggregate excess demand for good 1
Net/Excess demand of consumer A for good 1
The Algebra of Equilibrium
Equilibrium is a set of prices (p1*;p2*) such that
total demand for each good equals total supply
Competitive Equilibrium: we must have
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
Edgeworth Box: adjustment to equilibrium
Edgeworth Box: Disequilibrium
Economic Problem
Given initial endowments, what is the allocation that ensures that
consumers maximise their utility
demand equals supply in all markets
Trade and Pareto Efficiency: The Core
Contract curve (Pareto set)
<~the#et/f!ll!reto%fficient/ints)n$he%dgeworth"ox
Edgeworth-Bowley Box: Pareto Efficiency
Pareto Efficiency
A Pareto efficient allocation is such that
there is no way to make all the people involved better off
there is no way to make some individual better off without making someone else worse off
all the gains from trade have been exhausted
there are no mutually advantageous trades to be made
Pareto improvement and trade
Pareto-improving allocation
An allocation of the endowment that improves the welfare of a consumer without reducing the welfare of another
Edgeworth-Bowley Box: Trade
All points in the box, including the boundary, represent
feasible allocations of the combined endowment
Edgeworth-Bowley Box: Endowment
Feasible allocation
xA1 + xB1 < wA1 + wB1 and xA2 + xB2 < wA2 + wB2
general equilibrium analysis
Prices of other goods may/will affect people’s demands and supplies for a particular good (e.g. substitutes, complements ...)
In exchange, we relax some assumptions
Identical consumers
Exogenous prices
Differents payoffs
Oligopoly: Comparing the outcomes
Monopoly / Collusion VS Cournot VS Stackelberg
Collusion
The Stackelberg equilibrium
Leader’s profit-maximizing output, Follower's profit-maximizing output, Individuals output, Industry output
The leader's problem
The follower's problem
Stackelberg Competition: Example
Consider an industry which is characterised as follows:
Two firms producing an identical good
(Inverse) demand is given by: p(y) = a - by = a - b(y1 + y2)
Each firm has a zero marginal cost
Firm 1 has a first-mover advantage
Find the Stackelberg equilibrium (y1;y2) for this industry.
Solve the follower’s problem to obtain the reaction function.
2 Solve the leader’s problem.
Stackelberg Competition: Main Assumptions
Sequential quantity setting
Two firms producing identical product
Assume firm 1 chooses its quantity first. Firm 2 observes q1 and then chooses q2.
! Backward solution: Solve firm 2’s problem first as firm 1 (the leader) needs to anticipate the follower’s reactions.
