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. Relative Price mattersOB OA

7. Cobb-Douglass example

8. Geometry OB OA

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

10. Perfect substitutes: EfficiencyOB OA

11. Perfect substitutes: equilibrium
Competitive equilibrium:

12. Perfect substitutes: EquilibriumOB OA

13. Qualilinear Preferenes: EfficiencyOB OA

14. Quasilinear Preferences: Equilibrium

15. Geometry OB OA

16. Application: Irving Fisher r
Competitive equilibrium r

17. Geometry OB OA

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

19. Geometry OB OA