1. L13
General Equilibrium

2. Review Model of choice of individual We know preferences and
we find demands
With many such agents:
Q1: How prices are formed?
Q2: Are markets efficient?

3. “Economy” with apples and oranges
Two consumers, A and B.
Total resources available
Feasible allocation
and

4. Geometric representation
Four numbers and geometric representation
Insane?
No: Edgeworth box
Collection of all feasible allocations

5. Edgeworth Box OB OA

6. Desirable Allocation: Pareto Efficient
When allocation is “socially” efficient?
- Maximizing sum of utilities? NO!
- Weaker notion: Pareto efficiency!
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

7. Pareto Efficiency
Necessity of … OB OA

8. Pareto Efficiency
Sufficiency of tangency OB OA

9. Equivalent Characterization
Assume Interior Allocations
Allocation is Pareto efficient
if and only if indifference curves are tangent (equal MRS)
Are initial endowments efficient?

10. Example: OB OA

11. Contract Curve
Contract curve is the set of all Pareto-optimal allocations. OB OA

12. Cobb-Douglass example

13. Contract Curve
Cobb Douglass OB OA

14. Contract Curve
Perfect substitutes OB OA