Lecture Microeconomics (5th edition): Chapter 16 - General equilibrium theory. This chapter presents the following content: General equilibrium – Analysis I, efficiency and perfect competition, general equilibrium – Analysis II. | General Equilibrium Theory Chapter 16 Copyright (c)2014 John Wiley & Sons, Inc. 1 1 Chapter Sixteen Overview General Equilibrium – Analysis I Partial Equilibrium Bias Efficiency and Perfect Competition General Equilibrium – Analysis II The Efficiency if Competition The Edgeworth Box Analysis of Allocation: A Pure Exchange Economy Analysis of Production Chapter Sixteen Copyright (c)2014 John Wiley & Sons, Inc. 2 Chapter Sixteen Partial vs. General Equilibrium If there are spillover effects from one market to another, then the effects of a change in one market on the economy must be analyzed by examining its effect on all markets Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Sixteen Partial vs. General Equilibrium Further, many exogenous events (or policy changes) affect many markets simultaneously (example: discovery of a major oil deposit that raises the income of all citizens in an economy and so affects equilibrium in all markets). If we do not take into account all markets in | General Equilibrium Theory Chapter 16 Copyright (c)2014 John Wiley & Sons, Inc. 1 1 Chapter Sixteen Overview General Equilibrium – Analysis I Partial Equilibrium Bias Efficiency and Perfect Competition General Equilibrium – Analysis II The Efficiency if Competition The Edgeworth Box Analysis of Allocation: A Pure Exchange Economy Analysis of Production Chapter Sixteen Copyright (c)2014 John Wiley & Sons, Inc. 2 Chapter Sixteen Partial vs. General Equilibrium If there are spillover effects from one market to another, then the effects of a change in one market on the economy must be analyzed by examining its effect on all markets Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Sixteen Partial vs. General Equilibrium Further, many exogenous events (or policy changes) affect many markets simultaneously (example: discovery of a major oil deposit that raises the income of all citizens in an economy and so affects equilibrium in all markets). If we do not take into account all markets in our equilibrium calculation, we induce a bias in our analysis. Copyright (c)2014 John Wiley & Sons, Inc. 4 Chapter Sixteen Partial vs. General Equilibrium Definition: General Equilibrium analysis is the study of how equilibrium is determined in all markets simultaneously (. product markets and labor markets). Definition: Partial Equilibrium analysis is the study of how equilibrium is determined in only a single market (. a single product market). Copyright (c)2014 John Wiley & Sons, Inc. 5 Chapter Sixteen Partial vs. General Equilibrium Example: Equilibrium in two markets Q1D = 12 – 3p1 + p2 Q1s = 2 + p1 Q2D = 4 – 2p2 + p1 Q2s = 1 + p2 What is the general equilibrium level of prices and output in this economy? Market 1 equilibrium: 12 – 3p1 + p2 = 2 + p1 p1 = 10/4 + p2/4 Market 2 equilibrium: 4 – 2p2 + p1 = 1 + p2 p2 = 1 + p1/3 Copyright (c)2014 John Wiley & Sons, Inc. 6 Chapter Sixteen Partial vs. General Equilibrium Substituting condition 1 into condition 2: 4 – 2p2 + 10/4 + .
