平狄克微观经济学General-Equilibrium-and-Economic-Efficienc.ppt

Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Chapter 16,*,2005 Pearson Education,Inc.,Chapter 16,General Equilibrium and Economic Efficiency,Topics to be Discussed,General Equilibrium Analysis,Efficiency in Exchange,Equity and Efficiency,Efficiency in Production,2,Chapter 16,Topics to be Discussed,The Gains from Free Trade,An Overview:The Efficiency of Competitive Markets,Why Markets Fail,3,Chapter 16,General Equilibrium Analysis,Up to this point,we have been focused on partial equilibrium analysis,Activity in one market has little or no effect on other markets,Market interrelationships can be important,Complements and substitutes,Increase in firms input demand can cause market price of the input and product to rise,4,Chapter 16,General Equilibrium Analysis,To study how markets interrelate,we can use,general equilibrium analysis,Simultaneous determination of the prices and quantities in all relevant markets,taking into account feedback effects,The,feedback effect,is the price or quantity adjustment in one market caused by price and quantity adjustments in related markets,5,Chapter 16,Two Interdependent Markets Movies and DVDs,D,V,D,M,Price,Number,of Videos,Price,Number of,Movie Tickets,S,M,S,V,$6.00,Q,M,Q,V,$3.00,$6.35,Q,M,S*,M,$1 tax on each movie ticket causes supply to fall,D,V,Q,V,$3.50,General Equilibrium Analysis:,Increase in movie ticket prices,increases demand for videos.,8,Two Interdependent Markets Movies and DVDs,Price,Number,of Videos,Price,Number of,Movie Tickets,D,M,S,M,$6.00,Q,M,$6.35,Q,M,S*,M,The increase in the price,of videos increases the,demand for movies.,D,V,D,V,S,V,Q,V,$3.00,Q,V,$3.50,General Equilibrium Analysis:,The Feedback effects continue.,D*,M,$6.82,Q*,M,Q”,M,$6.75,D,M,$3.58,Q*,V,D*,V,9,Chapter 16,Two Interdependent Markets Movies and DVDs,Observation,Without considering the feedback effect with general equilibrium,the impact of the tax would have been,underestimated,This is an important consideration for policy makers,You can check for yourself that in the market for complements,the tax would be overestimated,10,Chapter 16,Reaching General Equilibrium,Must be able to determine the equilibrium price of both movies and DVDs simultaneously,We must simultaneously find two prices that equate quantity demanded and quantity supplied in all related markets,The requires finding the solution to four equations:demand and supply for DVDs and movies,11,Chapter 16,The Interdependence of International Markets,Brazil and the United States compete in the world soybean market,so one market can affect the other,Brazil limited exports of soybeans in the late 1960s and early 1970s,causing price in Brazil to fall,Eventually the export controls were to be removed,and Brazilian exports were expected to increase,12,Chapter 16,The Interdependence of International Markets,Expectation was based on partial equilibrium analysis,Program actually increased the price and production of soybeans in US as well as US exports,This caused Brazil to have difficulties exporting even after control was removed,Can show how each market was affected and compare to general equilibrium analysis,13,Chapter 16,Soybean Exports Brazil and US,14,Efficiency in Exchange,We showed before that competitive markets are efficient because consumer and producer surpluses are maximized,We can study this in more detail by examining an exchange economy,Market in which two or more consumers trade two goods among themselves,Same for two countries,15,Chapter 16,Efficiency in Exchange,An efficient allocation of goods is one where no one can be made better off without making someone else worse off,Pareto efficiency,Voluntary trade between two parties is mutually beneficial and increases economic efficiency,16,Chapter 16,The Advantages of Trade,Assumptions,Two consumers(countries),Two goods,Both people know each others preferences,Exchanging goods involves zero transaction costs,James and Karen have a total of 10 units of food and 6 units of clothing,17,Chapter 16,The Advantage of Trade,Individual,Initial Allocation,Trade,Final Allocation,James,7F,1C,-1F,+1C,6F,2C,Karen,3F,5C,+1F,-1C,4F,4C,To determine if they are better off,we need to know the preferences for food and clothing,18,Chapter 16,The Advantage of Trade,Karen has a lot of clothing and little food,MRS of food for clothing is 3,To get 1 unit of food,she will give up 3 units of clothing,James MRS of food for clothing is only,He will give up unit if clothing for 1 unit of food,19,Chapter 16,The Advantage of Trade,There is room for trade,James values clothing more than Karen,Karen values food more than James,Karen is willing to give up 3 units of clothing to get 1 unit of food,but James is willing to take only unit of clothing for 1 unit of food,Actual terms of trade are determined through bargaining,Trade for 1 unit of food will fall between and 3 units of clothing,20,Chapter 16,The Advantage of Trade,Suppose Karen offers James 1 unit of clothing for 1 unit of food,James will have more clothing,which he values more than food,Karen will have more food,which she values more,Whenever two consumers MRSs are different,there is room for mutually beneficial trade,Allocation of resources is inefficient,21,Chapter 16,The Advantage of Trade,From this analysis we obtain an important result:,An allocation of goods is efficient only if the goods are distributed so that the marginal rate of substitution between any pair of goods is the same for all consumers,22,Chapter 16,The Edgeworth Box Diagram,A diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes is called an,Edgeworth Box,23,Chapter 16,The Edgeworth Box Diagram,Food is measured across the horizontal axis,Clothing is measured on the vertical axis,Length of box is the total amount of food 10 units,Height of box is the total amount of clothing 6 units,24,Chapter 16,The Edgeworth Box Diagram,Each point describes the market baskets of,both,consumers,James basket is read from origin O,J,Karens basket is read from origin O,K,in the reverse direction,James has 7 units of food and 1 unit of clothing point A,Karen has 3 units of food and 5 units of clothing point A from different axis,25,Chapter 16,Exchange in an Edgeworth Box,10F,0,K,0,J,6C,10F,6C,James,Clothing,Karens,Clothing,James Food,Karens Food,1C,5C,3F,7F,A,The initial allocation,before trade is,A,:James,has 7F and 1C&Karen,has 3F and 5C.,26,Exchange in an Edgeworth Box,James Food,Karens Food,10F,0,K,0,J,6C,10F,6C,James,Clothing,Karens,Clothing,1C,5C,3F,7F,A,The allocation,after trade is B:James,has 6F and 2C&Karen,has 4F and 4C.,4F,6F,+1C,-1F,2C,4C,B,27,Chapter 16,Efficient Allocations,A trade from A to B makes both Karen and James better off,Is it efficient?,If James and Karens MRS are the same at B,the allocation is efficient,This depends on the shape of their indifference curves,28,Chapter 16,Efficient Allocations,James indifference curves are drawn as we usually see them,Karens indifference curves are rotated 180,o,convex to her axis,The indifference curves that go through point A have different slopes and therefore different MRSs,The allocation is not efficient,29,Chapter 16,Efficient Allocations,The shaded area between these two indifference curves represents all the possible allocations of food and clothing that would make both James and Karen better off than A,Describes all mutually beneficial trades,30,Chapter 16,Efficient Allocations,We can see both parties are better off at point B since they both end up on a higher indifference curve,Not efficient since MRSs are different indifference curves have different slopes,Although a trade might make both parties better off,the new allocation is not necessarily efficient,31,Chapter 16,Efficient Allocations,How do these parties reach an efficient allocation?,When there is no more room for trade,When their MRSs are equal,They will keep trading,reaching higher indifference curves,until they can no longer do so and still make each better off,This is when indifference curves are tangent they have the same slope and same MRS,32,Chapter 16,A,:U,J,1,=U,K,1,but the MRS,is not equal.,All combinations,in the shaded,area are,preferred to,A.,Karens,Clothing,Karens Food,U,K,1,Jamess,Clothing,Jamess Food,U,J,1,Efficiency in Exchange,10F,0,K,0,J,6C,10F,6C,Gains from,trade,A,33,Chapter 16,Efficiency in Exchange,Karens,Clothing,Karens Food,Jamess,Clothing,Jamess Food,10F,0,K,0,J,6C,10F,6C,U,K,1,U,J,1,A,Point B is on higher IC but is not efficient,U,J,2,U,K,2,B,At point C,MRSs are equal and allocation is efficient,U,K,3,C,D is also a possible efficient allocation depending on bargaining,U,J,3,D,34,Chapter 16,Efficiency in Exchange,Any move outside the shaded area will make one person worse off(closer to their origin),B is a mutually beneficial trade-higher indifference curve for each person,Trade may be beneficial but not efficient,MRS is equal when indifference curves are tangent and the allocation is efficient,A,Karens,Clothing,Karens Food,U,K,1,U,K,2,U,K,3,James,Clothing,James Food,U,J,1,U,J,2,U,J,3,B,C,D,10F,0,K,0,J,6C,10F,6C,35,Chapter 16,Efficiency in Exchange,The Contract Curve,To find all possible efficient allocations of food and clothing between Karen and James,we would look for all points of tangency between each of their indifference curves,The,contract curve,shows all the efficient allocations of goods between two consumers,or of two inputs between two production functions,36,Chapter 16,The Contract Curve,0,J,James,Clothing,Karens,Clothing,0,K,Karens Food,James Food,E,F,G,Contract,Curve,E,F,&G,are,Pareto efficient.,37,Chapter 16,Contract Curve,All points of tangency between the indifference curves are efficient,MRS of individuals is the same,No more room for trade,The contract curve shows all allocations that are Pareto efficient,Pareto efficient allocation occurs when further trade will make someone worse off,38,Chapter 16,Efficiency in Exchange,Application:The policy implication of Pareto efficiency when removing import quotas:,Remove quotas,US consumers gain,Some US workers lose,Removal of quotas and subsidies to the workers,39,Chapter 16,Efficiency in Exchange,US consumers would be better off and after a time,the US workers are no worse off and might be better off,Package will increase efficiency,Efficiency,therefore,can be reached when the,combined,set of changes leaves someone better off and no one worse off,40,Chapter 16,Efficiency in Exchange,Consumer Equilibrium in a Competitive Market,Competitive markets have many actual or potential buyers and sellers,so if people do not like the terms of an exchange,they can look for another seller who offers better terms,41,Chapter 16,Consumer Equilibrium in a Competitive Market,There are many Jameses and Karens,They are price takers,Relative price of food and clothing=1,Trade depends on relative prices,not actual prices,42,Chapter 16,Consumer Equilibrium in a Competitive Market,We can show opportunities for trade for many consumers,When prices of food and clothing are equal,we can show the price line,PP with a slope of 1,Shows all possible allocations that exchange can achieve,James buys 2 clothing for 2 food:A to C,Karen buys 2 food for 2 clothing:A to C,Both increase satisfaction,43,Chapter 16,Consumer Equilibrium in a Competitive Market,Price Line,10F,0,K,0,J,6C,10F,6C,James,Clothing,Karens,Clothing,Karens Food,James Food,C,A,Begin at A:,Each James buys 2C and sells 2F,moving from U,J,1,to U,J,2,which,is preferred(A to C).,Begin at A:,Each Karen buys 2F and sells 2C moving from,U,K,1,to U,K,2,which,is preferred(A to C).,P,P,U,J,2,U,J,1,U,K,1,U,K,2,44,Chapter 16,Consumer Equilibrium in a Competitive Market,The amount of clothing that Karen wanted to sell is equal to the amount of clothing that James wanted to buy,An,equilibrium,is a set of prices at which the quantity demanded equals the quantity supplied in every market,Also called,competitive equilibrium,45,Chapter 16,Consumer Equilibrium in a Competitive Market,Not all prices lead to equilibrium,If the MRSs of the players are not equal,then we are not in equilibrium,If the price of food is 1 and price of clothing is 3:,James is unwilling to trade,MRS=,Karen is happy to sell clothing at that price but has no one to sell to,Market is in disequilibrium,46,Chapter 16,Consumer Equilibrium in a Competitive Market,Disequilibrium is only temporary in a competitive market,Excess demand will cause price to rise,Excess supply will cause price to fall,In our example,we have excess supply of clothing and excess demand of food,Should expect the price of food to increase relative to price of clothing,Prices adjust until equilibrium is reached,47,Chapter 16,Economic Efficiency of Competitive Markets,As shown before,we can see that the allocation in a competitive equilibrium is economically efficient,The efficient point must occur where the two indifference curves are tangent,If not,one of the consumers can increase their utility and be better off,48,Chapter 16,Consumer Equilibrium in a Competitive Market,In a general equilibrium setting where all markets are perfectly competitive,we can show the same result,Best example of Adam Smiths invisible hand,Economy will automatically allocate all resources efficiently without need for regulatory control,Supports argument for less government intervention and more highly competitive markets,49,Chapter 16,Consumer Equilibrium in a Competitive Market,First Theorem of Welfare Economics,If everyone trades in a competitive marketplace,all mutually beneficial trades will be completed and the resulting equilibrium allocation of resources will be economically efficient,Welfare economics involves the normative evaluation of markets and economic policy,50,Chapter 16,Consumer Equilibrium in a Competitive Market,Competitive equilibrium,Because the indifference curves are tangent,all MRSs are equal between consumers,Because each indifference curve is tangent to the price line,each persons MRS is equal to the price ratio of the two goods,51,Chapter 16,Consumer Equilibrium in a Competitive Market,Difficult for efficient allocation with many consumers and producers unless all markets are perfectly competitive,Efficient outcomes can also be achieved by centralized system,Competitive outcome preferred since consumers and producers can better assess their preferences and supplies,52,Chapter 16,Equity and Efficiency,Although there are many efficient allocations,some may be more fair than others,The difficult question is,what is the most equitable allocation?,We can show that there is no reason to believe that efficient allocation from competitive markets will give an equitable allocation,53,Chapter 16,The Utility Possibilities Frontier,From the Edgeworth Box,we showed a two person exchange,The,utility possibilities frontier,represents all allocations that are efficient in terms of the utility levels of