Chapter 16 General Equilibrium and Economic Efficiency
Chapter 16 General Equilibrium and Economic Efficiency
Topics to be Discussed a General Equilibrium Analysis a Efficiency in EXchange a Equity and Efficiency a Efficiency in Production Chapter 16 Slide 2
Chapter 16 Slide 2 Topics to be Discussed ◼ General Equilibrium Analysis ◼ Efficiency in Exchange ◼ Equity and Efficiency ◼ Efficiency in Production
Topics to be Discussed a The gains from free trade On Overview--The Efficiency of Competitive Markets ■ Why Markets Fail Chapter 16 Slide 3
Chapter 16 Slide 3 Topics to be Discussed ◼ The Gains from Free Trade ◼ On Overview--The Efficiency of Competitive Markets ◼ Why Markets Fail
General Equilibrium Analysis a Partial equilibrium analysis presumes that activity in one market is ndependent Of other markets Chapter 16 Slide 4
Chapter 16 Slide 4 General Equilibrium Analysis ◼ Partial equilibrium analysis presumes that activity in one market is independent of other markets
General Equilibrium Analysis a General equilibrium analysis determines the prices and quantity in all markets simultaneously and takes the feedback effect into account Chapter 16 Slide 5
Chapter 16 Slide 5 General Equilibrium Analysis ◼ General equilibrium analysis determines the prices and quantity in all markets simultaneously and takes the feedback effect into account
General Equilibrium Analysis aA feedback effect is a price or quantity adjustment in one market caused by price and quantity adjustments in related markets Chapter 16 Slide 6
Chapter 16 Slide 6 General Equilibrium Analysis ◼ A feedback effect is a price or quantity adjustment in one market caused by price and quantity adjustments in related markets
General Equilibrium Analysis a TWo Interdependent Markets--Moving to General Equilibrium e Scenario The competitive markets of Videocassette rentals Movie theater tickets Chapter 16 Slide 7
Chapter 16 Slide 7 General Equilibrium Analysis ◼ Two Interdependent Markets--Moving to General Equilibrium ⚫ Scenario ◆The competitive markets of: ⚫ Videocassette rentals ⚫ Movie theater tickets
Two Interdependent Markets Movie tickets and videocassette Rentals Assume the government General Equilibrium Analysis: Price imposes a $1 tax on Increase in movie ticket prices each movie ticket Price increases demand for videos S M $350 $635 $300 $600 v M QM Number of v Qv Numbe Movie Tickets of videos
DM DV Two Interdependent Markets: Movie Tickets and Videocassette Rentals Price Number of Videos Price Number of Movie Tickets SM SV $6.00 QM QV $3.00 $6.35 Q’M S*M Assume the government imposes a $1 tax on each movie ticket. Q’V D’V $3.50 General Equilibrium Analysis: Increase in movie ticket prices increases demand for videos
Two Interdependent Markets Movie tickets and videocassette Rentals The increase in the price Price of videos increases the The Feedback demand for movies Price effects continue S M $6.82 $675 $358 $350 $635 D v $300 $600 v M QmQM Qm Qm Number of QyQ’vQv Numbe Movie Tickets of videos
DM DV Two Interdependent Markets: Movie Tickets and Videocassette Rentals Price Number of Videos Price Number of Movie Tickets SM SV $6.00 QM QV $3.00 The Feedback effects continue. $3.58 Q*V D*V $6.35 Q’M D*M $6.82 Q*M S*M Q’V D’V $3.50 D’M Q”M $6.75 The increase in the price of videos increases the demand for movies
TWo Interdependent Markets Movie Tickets and videocassette Rentals ○ bservation Without considering the feedback effect with general equilibrium, the impact of the tax would have been underestimated o This is an important consideration for policy makers Chapter 16 Slide 10
Chapter 16 Slide 10 ◼ 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. Two Interdependent Markets: Movie Tickets and Videocassette Rentals