General Equilibrium Model L-1/1 Contents Partial

Transcript:General Equilibrium Model L-1/1 Contents Partial:
General Equilibrium Model L-1/1 Contents Partial vrs. General equilibrium Walrasian S System GE Paretian system of General Equilibrium Walrasin General Equilibrium Model 1. It defined as state in which all the markets and decisions making units are in simultaneous equations. If each market is cleared at a positive price. Consumer maximising satisfaction. Firm maximising profits. Product market and factor market must be determined simultaneously. 2. GEM simultaneous equation model Millions of unknown with millions of equations. Behavioural equations: dd and ss functions Clearing market mechanism. GEM: Léon Walras, Léon Walras (French: 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the development of general equilibrium theory. Contributions Walras's law , General equilibrium. In 1874 and 1877 Walras published Éléments d'économie politique pure (1899, 4th ed.; 1926, éd. définitive), Inn English, Elements of Pure Economics (1954), translated by William Jaffé. That work that led him to be considered the father of the general equilibrium theory. Walras's law implies that the sum of the values of excess demands across all markets must equal zero, whether or not the economy is in a general equilibrium. This implies that if positive excess demand exists in one market, negative excess demand must exist in some other market. Thus, if all markets but one are in equilibrium, then that last market must also be in equilibrium. GEN: Leon Walras 1.All the prices and quantities in all markets determined simultaneously. 2.It is presented by a set equations. 3.Consumers have double role: he buys commodities and sells factors of productions to firms. Dd for commodities means quantities of commodities it produces. Ss of factor inputs means dd for factor inputs. Simultaneity means inter dependency. Millions of SEM with unknowns. 4. Three characteristics. Many markets=Many commodities=many factors of productions. Ss function=dd functions=clearing the market. Commodity market=dd functions= no. Of conumers. SS function=no of firms. No of equation= no.unknowns. Economic efficiency: Pareto Optimality Velfredo Pareto (1848-1923): rejected the classical view of social welfare Cardinal utility and additive nature Interpersonal comparison of utility Pareto Criterion Improvement Optimality/efficiency Pareto improvement is a position from which it is possible to make someone better off without making someone worse off by any re-allocation of resources and outputs. Pareto optimality is a position from which it is impossible to make anyone better off