1. General Equilibrium (cont)

2. Edgeworth Box OB OA

3. Desirable Allocation: Pareto Efficient
Allocation x Pareto efficient, if there does not exist allocation y that is
A) at least as good as x for all
B) is strictly better for at least one
All Pareto efficient allocations=contract curve

4. Pareto efficiency OB OA

5. Competitive equilibrium
Definition: Competitive equilibrium
optimal given
such that markets clear
Two tricks
Only relative price determined
Walras Law: second market will clear auctomatically

6. Cobb-Douglass example

7. Geometry OB OA

8. Invisible Hand (Adam Smith)
Are markets (Pareto) efficient?
First Welfare Theorem: allocation in Competitive equilibrium is Pareto optimal
Proof OB OA

9. Perfect substitutes: EfficiencyOB OA

10. Perfect substitutes: Equilibrium
Competitive equilibrium:

11. Perfect substitutes: EquilibriumOB OA

12. Other Preferences
Quasilinear
Perfect complements

13. Application: Irving Fisher r
Determination of competitive interest rate

14. Application: Irving Fisher r
Competitive equilibrium

15. Geometry OB OA

16. Application: Uncertainty
Arrow Securities:
No idiosyncratic risk in equilibrium

17. Geometry OB OA