Saturday, 3 December 2011

Economics courses are sometimes like this


Part V1

General Equilibrium and Welfare Economics

A Simple Exchange Economy Consider an economic system in which there are two goods, made available to consumers at constant rates per unit of time. There is no production, the goods are simply regularly delivered from the outside. Moreover, let there be only two consumers in this economy. Certain properties of general equilibrium systems may be displayed in terms of this simple exchange economy and its essential aspects can be set out in a diagram. Let the goods with which the economy is endowed be called X and Y, and let us call the two consumers A and B. In figure 18.1 we measure quantities of X on the horizontal axis and of Y on the vertical. There is a maximum amount of X in the economy, X0, and a maximum amount of Y, 170 , so let us close off the space above and to the right of the axes at these quantities, thus drawing a box. Let us measure the quantity of X available for consumer A (XA) from left to
right along the horizontal axis and the quantity of Y available to him ( YA ) from bottom to top of the vertical axis. If we do this it is apparent that Xo minus A's consumption of X gives us the amount left over for B to consume, while Yo minus A, consumption of Y gives us the amount of Y left over for B. That is, if we treat the bottom left-hand comer of our box as the origin from which A, consumption is to be measured, the top right-hand corner becomes the origin from which B, consumption can be measured. If we impose the condition that A and B between them will consume all available goo., then we may interpret any point within the box as representing a combination of X and Y consumed by A and a combination of X and Y consumed by B. Thus, if A consumes XA of X and YA of Y, then B will consume Xo—XA and Yo— YA , and the point labelled H represents this joint consumption pattern. Any point within the box — including those on the axes —represents a joint consumption pattern that is feasible given the quantities of X and Y available. We may draw our two individuals' preference patterns for X and Y as figure 18.2. A's satisfaction increases as we move from bottom left to top right and B, increases as we move from top right to bottom left. If our two individuals trade X and Y on a competitive market, so that X is purchased and paid for in terms of Y, and vice versa, there is a little that we can say about the equilibrium solution to their trading activities. An essential characteristic of a competitive market is that every participant in it trades at the same price for each good. Equally essential as a characteristic of the behaviour of a utility maximising individual is that he equates the marginal rate of substitution between goods to the ratio of their prices. If we combine these two properties with the condition that joint consumption of X and Y must just exhaust the amounts of these goods available, we may deduce that the market for X and Y will be in equilibrium somewhere along a line which passes through all those points at which the two individuals' indifference curves are tangent to each other. This line is known as a contract curve and links up all those points at which A's marginal rate of substitution of X for Y is equal to B's — and hence equal to a common price ratio — and at which their joint consumption just exhausts


Related:
International Student Course Satisfaction
Table of feedback scores for the economics degrees for the universities that take most international students. Most of the courses are at the bottom of the league table for student feedback
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