3.1 T2: Edgeworth box Flashcards Preview

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Flashcards in 3.1 T2: Edgeworth box Deck (26)
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1
Q

What is meant by pure exchange?

A

Assumption that goods are attained exogenously, then traded

2
Q

See and learn

A

Edgeworth box set up page 1 my notes learn how to draw it

3
Q

What does an EWB allow us to do?

A

Analyse the exchange of goods between 2 people

4
Q

What are endowments?

A

Goods the economy starts with

5
Q

What is an allocation? What makes it feasible?

A

Pair of consumption bundles. Feasible if there’s enough good to fulfill it

6
Q

If there is a lens in the EWB what does this mean?

A

Both players can increase their own utility by trading and moving into the lens -> Pareto improvement
Trading continues until lens is eliminated, and the two ICs will be tangent to each other

7
Q

See

A

Slide 28 ‘definitions of pareto efficient allocations)

8
Q

What is a contract curve? Draw it.

A

Also known as a Pareto set, it is the line joining all the PEAs. It goes into the origins of both players

9
Q

See

A

Market trade in EWB (w. prices) side 2 page 1 my notes, learn diagram

10
Q

Where must the budget constraint go through?

A

The endowment point

11
Q

Define gross demand?

A

How much of each good a person wants

12
Q

Difference between gross demand and endorsement?

A

Net demand

13
Q

What is the role of the auctioneer? and people?

A

Sets prices

People then calculate their wealth then work out how much to trade

14
Q

What does changing the prices do?

A

It pivots the budget constraint around the endowment until it is tangent to the ICs of A&B at the same point

15
Q

How do we know in equilibrium, the solution is Pareto efficient?

A

It lies on the contract curve

16
Q

Define Walrasian equilibrium?

A

(/market/competitive eq.):

Set of prices such that each consumer is choosing the most preferred affordable bundle, and D=S in all markets

17
Q

3 sufficient conditions for equilibrium in EWB?

A

1) total D = total S
2) Sum of net demand for each agent should =0 for each good
3) In equilibrium, aggregate net demand =0
If any of these 3 points hold you have found an equilibrium
See bottom of page 1 side 2

18
Q

What is Walras’ Law?

A

For any set of prices (p1,p2) it is true that p1z1+p2z2=0

See notes!!!

19
Q

See

A

Example CD utility functions

20
Q

How to find the relative prices of 2 good that clear the market?

A

See notes (key point: must set one of the prices=1)

21
Q

Scaling up, how can we be sure there is actually an equilibrium?

A

As long as aggregate net demand is continuous, we will be able to find an equilibrium - this is still true if many consumers!

22
Q

Is this equilibrium always Pareto efficient, or are gains-to-trade available?

A

All market equilibria are Pareto Efficient (First theorem of welfare economics)

23
Q

Is a Pareto efficient allocation always a market equilibrium?

A

No - if preferences aren’t convex then not necessarily (see diagram in notes)
BUT if preferences are convex, then any PEA is achievable as market outcome since a set of prices can be found such that slopes of ICs=slope of BC at tangency (STofWE)

24
Q

What is the Second Theorem of Welfare Economics?

A

If all agents have convex preferences, there will be a set of prices such that each PEA is a ME, given appropriate endowments (must begin somewhere on BC

25
Q

3 ‘strong’ assumptions of Welfare Economics?

A
Relies on strong assumptions:
-agents only act in self interest
-market operates efficiently
-no externalities
ALSO PEA is not the same as being 'fair' necessarily
26
Q

2 uses of STofWE?

A

Policies can target endowments (lump sum taxes) to get to the appropriate endowment point
Policies can target goods (price taxes) to reflect scarcity of different goods