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Division of the Humanities and Social Sciences

**Brief Notes on the Arrow–Debreu–McKenzie Model of an Economy
**

KC Border

January 2000 v. 2012.08.28::12.50

1

Commodities

The ﬁrst primitive concept is that of a commodity. A commodity is any good or service that may be produced, consumed, or traded. Commodities may distinguished by date, location, and state of the world. For mathematical simplicity we usually assume there is a ﬁnite number ℓ of commodities. The commodity space is thus Rℓ .

2

Tastes

The next concept is that of an idealized consumer or household. A consumer is partially described by a consumption set X, which is a subset of the commodity space. Elements x of X are ordered lists of quantities of commodities consumed. If xk < 0 it indicates that commodity k is a labor service being supplied. The other part of the description of a consumer is the consumer’s preference relation ≽ on X, which is generally assumed to be transitive, total, and reﬂexive. The relation x ≽ y is read x is at least as good as y. The strict preference relation ≻ is deﬁned by x≻y if x ≽ y but not y ≽ x,

and indiﬀerence ∼ is deﬁned by x∼y if x ≽ y and y ≽ x.

The set {y ∈ X : y ∼ x} is the indiﬀerence class of x or the indiﬀerence curve through x. The set {y ∈ X : y ≽ x} is the upper contour set at x, and {y ∈ X : y ≻ x} is the strict upper contour set at x. The relation y ≼ x means x ≽ y, etc. 1

2. 1. Each ≽i is nonsatiated. Conditions on production. 2 1 v. 2012. That is. then for every λ ∈ (0. 3. Conditions on consumption sets. 5. We may make use of the following assumptions.) 3.1 3 Technology The next concept is that of a production unit or enterprise which is characterized by its technology set Y .50 . There is free disposability. There is a possibility of inaction. Production is irreversible. Each Xi is closed. Y ∩ (−Y ) ⊂ {0}. then {y} − Rℓ ⊂ Y .28::12. 3. yk < 0 indicates that commodity k is used as an input and yk > 0 indicates that it is an output. 4.2 + The provision is explicit so that violations of condition 2 do not imply a violation of 3. The aggregate production set Y = n Yj is closed. For y belonging to Y . yet violating the possibility of inaction. That is. My formulation makes it easier + to construct economies satisfying free disposability and irreversibility. if y ∈ Y . Each Xi is convex. The aggregate production set Y = ∑n j=1 Yj ∑ is convex. 1) we have λx + (1 − λ)y ≻i y (provided λx + (1 − λ)y ∈ Xi ). This condition is usually written as −Rℓ ⊂ Y . Each Xi is bounded below. Each ≽i is continuous. In general there may be n enterprises. (Note that each j=1 Y j may be closed without Y being closed. 1. 0 ∈ Yj for each j.08. Preferences are convex. That is. if x ≻i y. 2. Conditions on preferences. 1. That is. 2.KC Border Arrow–Debreu–McKenzie Model 2 In general there may be m consumers.

. xm .KC Border Arrow–Debreu–McKenzie Model 3 4 Resources The third element in the description of an economy is the aggregate endowment ω ∈ Rℓ . One is to assume 0 ∈ Y j (possibility of inaction) for each producer and that each consumer satisﬁes ω i ∈ X i . . 2012.08. 5 Allocations E = (Xi . y n ) is ineﬃcient3 if there is some other x ¯ ¯ ¯ 1 . ω . ω m . . 0. . . y 1 . i=1 j=1 An allocation for the economy E is a list (x1 . . m j = 1. y 1 . . Do you see why it guarantees the existence of allocations?) 6 Eﬃciency An allocation (¯1 . . y 1 . . . Or Pareto dominated v. . . . . . . we might assume the existence of xi ∈ X i with xi ≪ ω i .50 . We typically assume ω ≧ 0. . . . . . ∑ A natural question is whether allocations exist at all. If we don’t wish to assume ω i ∈ X i . . . n n ∑ j=1 xi = ω + yj . . . . (Yj )n . . . but that is mainly a deﬁnition of what it means to be a resource. Then (ω 1 . 0) is an allocation. . . . y n ) such that allocation (x xi ≽i xi ¯ 3 for all i. . Let X = m X i . . ≽i )m . xm . . y n ) ( ) An economy is thus summarized by a list satisfying xi ∈ Xi y j ∈ Yj m ∑ i=1 i = 1. (There are other reasons we may make this assumption. . . xm .28::12. . and assume that Y exhibits free ˆ ˆ disposability. . i=1 The question is whether X ∩ (Y + ω) ̸= ∅. There are a couple of ways to guarantee this. . .

These shares are nonnegative and sum to unity: i θj ⩾ 0.. . An allocation is eﬃcient4 if it is not ineﬃcient. ω i )m . xm . (Yj )n . .. . (θj )i=1. which is an allocation together with a price system that is characterized by three properties.08.m .28::12. All markets clear. Each ﬁrm maximizes proﬁts.KC Border Arrow–Debreu–McKenzie Model 4 and xi ≻i xi ¯ for at least one i.. . 7 Private property In an economy with the social convention of private property. the aggregate endowment and all the enterprises are wholly owned by the consumers. . . .. the proﬁt generated by the input-output plan y at price vector p is p · y. Due to our sign conventions on inputs and outputs. y n . 1. Each consumer maximizes preferences subject to their budget constraint. and m ∑ i=1 i θj = 1 for all j. . 2012. taking prices as given.. for all i. 3. Here i=1 j=1 j=1. 2.50 . so m ω= i θj ∑ i=1 ωi. To completely describe such an economy and its property system A private ( ) i ownership economy E is a list (Xi . y 1 .n ω i is a list of consumer i’s initial private endowment of each commodity. ≽i . 8 Walrasian equilibrium The outcome of competitive markets in a private ownership economy is modeled as a Walrasian equilibrium. p). x ¯ ¯ ¯ ¯ where 4 Or Pareto eﬃcient or Pareto optimal v.... and is the share of ﬁrm j owned by consumer i. So formally a Walrasian equilibrium is a list (¯1 . j.

Existence and optimality of competitive equilibria. New Haven: Yale University Press.08.org/stable/1907353 [3] K. Existence of an equilibrium for a competitive economy. New York: SpringerVerlag. San Francisco: HoldenDay.pdf v. ¯ ¯ ¯ 2. ¯ 8. x ¯ ¯ ¯ m ∑ i=1 xi = ¯ m ∑ i=1 ωi + n ∑ j=1 yj . Debreu. D. J. p · xi ⩽ p · xi for all xi satisfying xi ≽ xi . 1971.edu/P/cm/m17/m17-all. [2] K. . 2012. Number 17 in Cowles Foundation Monographs. 1954. (Market clearing) (¯1 . . Hahn. (Expenditure minimization) For every consumer i. Theory of value: An axiomatic analysis of economic equilibrium. that is. in which the preference maximization property is replaced by an expenditure minimization property. Debreu. U.S. Aliprantis. (Proﬁt Maximization) For every ﬁrm j. [4] G.50 . .28::12. . J.pnas. and O.yale.jstor.KC Border Arrow–Debreu–McKenzie Model 5 1. Market equilibrium. 1989. y j ∈ Yj ¯ and p · y j ⩾ p · y j for all y j ∈ Y j . . xi ∈ Bi = {xi ∈ Xi : p·xi ⩽ p·ω i + ¯ ¯ ¯ n ∑ i θj p·¯j } and ¯y xi ≽i xi for all xi ∈ Bi . y 1 .1 Walrasian quasiequilibrium A closely related concept is that of a Walrasian quasiequilibrium. 1956. J. (Preference Maximization) For every consumer i. Arrow and F.org/cgi/reprint/42/11/876 [5] . cowles. Arrow and G. General competitive analysis. . 42(11):876–878. www. www.econ. Proceedings of the National Academy of Sciences.A. y n ) is an allocation. 2′ . . 1959. H. . ¯ ¯ Suggested references [1] C. Brown. Burkinshaw. D. ¯ j=1 3. Econometrica 22(3):265–290. xm .

New concepts and techniques for equilibrium analysis.jstor. Econometrica 27:54–71. 1981. 1956.org/stable/1907777 . New York: McGraw-Hill.1467-999X.1111/j. Metroeconomica 12(2–3):92–97. 1959. Saposnik.1956. Washington. Ellickson.tb00097.28::12.C. [10] [11] [12] . Metroeconomica 8(2):135–145. Competitive equilibrium: Theory and applications.. 1961. Three essays on the state of economic science.1960. Welfare economics and existence of an equilibrium for a competitive economy. Koopmans.jstor. 1962. Competitive equilibrium with dependent consumer preferences.org/stable/2525394 [7] B.50 . D.1111/j. 1960. Antosiewicz. On the existence of general equilibrium for a competitive market. USAF.08. C. [9] L. DOI: 10. Nikaidô. www. McKenzie. Introduction to general equilibrium theory and welfare economics. Econometrica 29(2):247–248. National Bureau of Standards and Directorate of Management Analysis. [8] T.KC Border Arrow–Debreu–McKenzie Model 6 [6] . Quirk and R. ed. W. DCS/Comptroller. P.jstor. Econometrica 49:819–841.org/stable/1912505 [13] T. 1993. www.jstor. In H. pages 277–294. A. v. International Economic Review 3(3):257–273. On the classical multilateral exchange problem.org/stable/1909294 tions. New York: McGraw–Hill.x [14] H.1467-999X. On the existence of general equilibrium: Some correcwww. 1955. 1957. The classical theorem on existence of competitive equilibrium. 2012.tb00275. DOI: 10. 1968. www. Proceedings of the Second Symposium in Linear Programming. Cambridge and New York: Cambridge University Press. .x [15] J. Negishi.

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