General Equilibrium and Efficiency Flashcards
(12 cards)
Explain how gains from exchange can be achieved in an exchange economy
- At endowment point R, both people can gain from exchange through allocations such as T within the shaded area
Explain the efficiency in exchange in the diagram here
- At this point of tangency between the two curves and at point M, there are no further gains from trade
- At this point, MRS of clothing for food are equal so no reason to trade further
What does pareto optimal mean
A situation in which it is impossible to make one person better off without making at least some others worse off
Explain a pareto optimal allocation on the boundary
- Owning car on endowment point R, Claire can reach pareto optimal if she trades her car for all the food to reach S
-If David initially owned the car the endowment would be point T so Claire would benefit from initially owning the car
Explain what this contract curve is
A curve which shows all the efficient ways of dividing the two goods betwen the two consumers
Explain using the diagram how initial endowments constrain final outcomes
Suppose the endowment point is G, trades will take place along the part of the contract curve between W and Z
What does this budget constraint HH’ show
Where two individuals can consume anywhere on this line
Explain what the diagram shows
- They both demand 20 clothing and sell 20 food
- Excess demand for clothing and excess supply of food
Explain the general equilibrium on the diagram here
- General equilibrium is when both indifference curves are tangential and at the same point
Explain the diagram here
Two firms producing different products using capital and labour
Contract curve is the locus of point of tangency between the two sets of isoquants
Explain efficiency in production
- The MRTS will be equal for the two firms in competitive
