Equilibrium Concepts in Microeconomics Flashcards
(16 cards)
What is the difference between partial and general equilibrium?
Partial equilibrium: Focuses on a single market, holding others constant
General equilibrium: Considers all markets simultaneously, including interactions
What condition defines equilibrium in a partial equilibrium model?
Market-clearing:
𝑄𝐷(𝑝∗)=𝑄𝑆(𝑝∗)
Demand equals supply at the equilibrium price
What is an excess demand function?
Z(p)=Q^D(p)−Q^S(p)
Equilibrium occurs when Z(p∗)=0
What is Walras’ Law?
If n−1 markets are in equilibrium, the nth must be too, due to budget constraints and income identities — ensures consistency across all markets.
What is the structure of a pure exchange economy?
2 consumers
2 goods
Each consumer has endowments
Trade occurs to maximise individual utility
Prices adjust to clear markets
What is the Edgeworth Box used for?
Graphical tool to analyse allocations of goods between two consumers — shows all feasible allocations and Pareto improvements
What is the contract curve?
The set of Pareto efficient allocations in the Edgeworth Box — where the consumers’ indifference curves are tangent (i.e., equal MRS)
What conditions define a competitive general equilibrium?
Utility maximisation by each consumer
Market clearing (demand = supply in all markets)
Feasible allocation (within the Edgeworth box)
What does the First Welfare Theorem state?
Every competitive equilibrium allocation is Pareto efficient, assuming no externalities, perfect competition, and convex preferences.
What does the Second Welfare Theorem state?
Any Pareto efficient allocation can be reached via a competitive equilibrium given appropriate redistribution of initial endowments.
What is Pareto efficiency?
An allocation where no one can be made better off without making someone else worse off.
How do prices function in general equilibrium?
They act as signals that coordinate individual decisions, ensuring that aggregate demand equals supply in all markets.
What is an offer curve in the Edgeworth box?
A curve tracing each consumer’s optimal bundles at different relative prices — equilibrium occurs where the offer curves intersect.
Do competitive equilibria guarantee fairness?
No — they are efficient, not necessarily equitable. That’s why redistribution policies may be used in practice (related to Second Welfare Theorem).
What guarantees the existence of a general equilibrium?
Under assumptions like continuity, convexity, and non-satiation, a fixed-point theorem (e.g. Brouwer or Kakutani) can prove existence.
