1. General Equilibrium (Social Efficiency)

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. Big ideas: Today: Edgeworth box Pareto efficiency Next lecture
Competitive equilibrium
First welfare theorem

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

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

6. Edgeworth Box OB OA

7. Socially Desirable Allocation Pareto Efficiency
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

8. Quiz Consider a two agent economy with
Q: Is allocation Pareto efficient
Yes No
Depends

9. Pareto Efficiency Assume Cobb Douglass preferences
Necessity of tangency OB OA

10. Pareto Efficiency
Sufficiency of tangency OB OA

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

12. Example: OB OA

13. Quiz
Let
Is allocation Pareto efficient
Yes No
Depends

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

15. Cobb-Douglass example

16. Contract Curve
Cobb Douglass OB OA

17. Contract Curve
Perfect substitutes OB OA

18. Contract Curve Other preferences A) General Perfect substitutes
B) Perfect Complements
C) Quasilinear