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Economics 1 Bentz Fall 2002 Topic 5

Economics 1 Bentz Fall 2002 Topic 5

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Published by Alexander Taylor
Lecture Notes for Dartmouth College's ECON 1. Taught by Andreas Bentz during 2002.
Lecture Notes for Dartmouth College's ECON 1. Taught by Andreas Bentz during 2002.

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Published by: Alexander Taylor on Sep 25, 2011
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02/04/2012

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DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICSECONOMICS 1
© Andreas Bentz
page 1
Dartmouth College, Department of Economics: Economics 1, Fall ‘02Dartmouth College, Department of Economics: Economics 1, Fall ‘02Dartmouth College, Department of Economics: Economics 1, Fall ‘02
Topic 5: WelfareTopic 5: Welfare
Economics 1, Fall 2002Andreas BentzBased Primarily on Frank Chapters 16 - 18
2
Review: EquilibriumReview: Equilibrium
Topic 3,
Consumer Theory 
:
foundations of Classical Demand Theory
utility maximisation
»
gives us individual demand
Topic 4,
Firms
:
profit maximisation (gives us factor demands)
cost minimisation (gives us cost curves)
»
recall: a firm’s supply curve is its marginal cost curve
The Equilibrium Principle
:
In a competitive market, price adjusts to equilibrate demandand supply: D(p*) = S(p*), p* is the equilibrium price.
 
DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICSECONOMICS 1
© Andreas Bentz
page 2
3
Partial and General EquilibriumPartial and General Equilibrium
So far, this study has been
 partial equilibriumanalysis
:
this ignores the fact that changes in the price of onegood generally change the demand for other goods,
and it ignores the fact that changes in the prices of goods that people sell change a person’s incomeand therefore their demand for other goods.
General equilibrium analysis
studies theinteraction between supply and demand inseveral markets.
Dartmouth College, Department of Economics: Economics 1, Fall ‘02Dartmouth College, Department of Economics: Economics 1, Fall ‘02Dartmouth College, Department of Economics: Economics 1, Fall ‘02
General EquilibriumGeneral Equilibrium
When everything’s fine:the Two Fundamental Theorems andother Nice Results.
 
DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICSECONOMICS 1
© Andreas Bentz
page 3
Dartmouth College, Department of Economics: Economics 1, Fall ‘02Dartmouth College, Department of Economics: Economics 1, Fall ‘02Dartmouth College, Department of Economics: Economics 1, Fall ‘02
ExchangeExchange
Wanna trade?
6
General Equilibrium: ExchangeGeneral Equilibrium: Exchange
Simplest setting:
two consumers: person A, person B
two goods: x
1
, x
2
pure exchange (no production)
In a pure exchange economy, a fixed amount of goodsis exchanged.
Initially, every consumer is endowed with some of each good;then they may engage in trade.
This allows us to study how prices change in response torelative scarcity.
How do we represent the possible allocations of thetwo goods between the two consumers?
We can represent this in an Edgeworth box.

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