Chapter13GeneralEquilibriumTopicstobeDiscussedGeneralEquilibriumAnalysisEfficiencyinExchangeEquityandEfficiencyEfficiencyinProductionTopicstobeDiscussedTheGainsfromFreeTradeAnOverview:TheEfficiencyofCompetitiveMarketsWhyMarketsFailGeneralEquilibriumAnalysisUptothispoint,wehavebeenfocusedonpartialequilibriumanalysis◦ActivityinonemarkethaslittleornoeffectonothermarketsMarketinterrelationshipscanbeimportant◦Complementsandsubstitutes◦Increaseinfirms’inputdemandcancausemarketpriceoftheinputandproducttoriseGeneralEquilibriumAnalysisTostudyhowmarketsinterrelate,wecanusegeneralequilibriumanalysis◦Simultaneousdeterminationofthepricesandquantitiesinallrelevantmarkets,takingintoaccountfeedbackeffectsThefeedbackeffectisthepriceorquantityadjustmentinonemarketcausedbypriceandquantityadjustmentsinrelatedmarketsEfficiencyinExchangeWeshowedbeforethatcompetitivemarketsareefficientbecauseconsumerandproducersurplusesaremaximizedWecanstudythisinmoredetailbyexamininganexchangeeconomy◦Marketinwhichtwoormoreconsumerstradetwogoodsamongthemselves◦SamefortwocountriesEfficiencyinExchangeAnefficientallocationofgoodsisonewherenoonecanbemadebetteroffwithoutmakingsomeoneelseworseoff◦ParetoefficiencyVoluntarytradebetweentwopartiesismutuallybeneficialandincreaseseconomicefficiencyGainfromTradeAssumptions◦Twoconsumers(countries)◦Twogoods◦Bothpeopleknoweachother’spreferences◦Exchanginggoodsinvolveszerotransactioncosts◦JamesandKarenhaveatotalof10unitsoffoodand6unitsofclothingGainfromTradeTodetermineiftheyarebetteroff,weneedtoknowthepreferencesforfoodandclothingIndividualInitialEndowmentTradeFinalAllocationJames7F,1C-1F,+1C6F,2CKaren3F,5C+1F,-1C4F,4CGainfromTradeJames’MRSoffoodforclothingisonly½◦Hewillgiveup½unitofclothingfor1unitoffoodKarenhasalotofclothingandlittlefood◦MRSoffoodforclothingis3◦Toget1unitoffood,shewillgiveup3unitsofclothingGainfromTradeThereisroomfortrade◦JamesvaluesclothingmorethanKaren◦KarenvaluesfoodmorethanJames◦Karen...
