Chapter 29
Exchange
Partial equilibrium
and
general equilibrium
Edgeworth box p497
A pure
exchange model of
two goods, two consumers
with fixed endowments w.
Region of mutual advantages.
 Pareto set and the contract curve.
 Bargaining for relative prices.
 Gross demand x (p) ,
 Net or excess demand
z (p) = x (p) - w (p).

GOOD 2
wB1
xB1
Person B
x A2
xB2
M
wA2
wB2
Endowment
Person A
x A1
wA1
GOOD 1
Contract
curve
GOOD 2
A Pareto efficient
allocation
Person A’s indifference
curve
Person B’s
indifference curve
Person A
Person B
Endowment
GOOD 1
From
disequilibrium to the
competitive equilibrium.
Which good is too cheap?
Offer curve
approach.
The existence problem of
equilibrium.
Equilibrium price
A’s offer curve
Good 1 is
Too cheap
E
B’s ind. curves
B’s offer curve
A’s ind, curves
W
Chapter 30
Production
The Robinson Crusoe economy
Coconuts
Indifference
curves
C*
Production function
L*
Labor
Production possibilities set
(Two outputs case)
COCNUTS
SLOPE=MARGINAL RATE
OF TRANSFORMATION
C*
PRODUCTION
POSSIBILITIES
SET
F*
FISH
C
P
A
Trade leads to
Separation of prod. and coms. (P/C),
Production specialization(A P), and
Wealth improvement( A C).
Heckscher-Ohlin theory on
international trade,
under many idealization assumptions.
*
Costs of exchange.
* Price difference between
selling and buying.
Fig.
*
GATT and WTO.
Chapter 30
Welfare
The social preference.
Two kinds of voting:
majority,
and
rank-order.
The social welfare
function.
 Benthamite:
W (u1, … ,u n ) = a 1u 1 + … + a n u n .
 Rawlsian:
W (u1, … ,u n ) = min {u1 , … , u n }.
Three requirements on a social
decision mechanism:
1, It should be complete, reflexive, and
transitive;
2, If everyone prefers X to Y, then the
society should prefer X to Y;
3, The preferences between X and Y
should depend only on how people rank
X versus Y, and not on how they rank
other alternatives.
Arrow's Impossibility Theorem
 If
a social decision mechanism
satisfies properties 1, 2, and 3,
then it must be a dictatorship:
all social rankings are the
rankings of one individual.