Market- General Equilibriun General Equilibrium a single budget line can be drawn for both consumers. It is a downwardly sloping straight line, which must pass through the endowment and have slope -P/pa(the price ratio) Definition: A general equilibrium is an allocation r and a set of prices p such that, Walrasian equilibrium). What is an equilibrium in this exchange economy? (Often called general competitit 1. Each consumer maximises their utility given their budget constraint. 2. Total demand for each good is no more than the total endowment The second condition is often called market clearing. Alternatively, the allocation must be feasible Market General Equilibriun Walras’Law Equilibrium(allocation z and prices PI and pz)can be illustrated in the Edgeworth box B Budget line Slope=-pi/p2 Both consumers are maximising utility given their budget constraints and the market clears for both goods Define aggregate excess demand for good 1 as z1(p1, p2)=(rA(p1, P2)-4)+(rB(p1, P2)-wB). This is the net amount of good 1 demanded by each consumer. At equilibrium prices, this is Following from the definitions of budget lines. Walras'law states that the value of aggregate excess demand is zero )+p2(1,P2)=0 So if the market clears exactly for one of the goods, it must clear exactly for the other.Market — General Equilibrium 5 General Equilibrium • A single budget line can be drawn for both consumers. It is a downwardly sloping straight line, which must pass through the endowment and have slope −p1/p2 (the price ratio). • What is an equilibrium in this exchange economy? (Often called general, competitive or Walrasian equilibrium). • Definition: A general equilibrium is an allocation x and a set of prices p such that: 1. Each consumer maximises their utility given their budget constraint. 2. Total demand for each good is no more than the total endowment. • The second condition is often called market clearing. Alternatively, the allocation must be feasible. Market — General Equilibrium 6 Walras’ Law • Equilibrium (allocation x and prices p1 and p2) can be illustrated in the Edgeworth box: ....................................................................................................................................................................................................................................................................................................................................................................................................................... ....................................................................................................................................................................................................................................................................................................................................................................................................................... . . .................................................................................................. ...... ...... ... ...... ...... ...... ... . ........................................................................................................ ........................................................................................................ A B • x Budget line Slope = −p1/p2 • ω • Both consumers are maximising utility given their budget constraints and the market clears for both goods. • Define aggregate excess demand for good 1 as z1(p1, p2) = (x 1 A(p1, p2) − ω 1 A) + (x 1 B(p1, p2) − ω 1 B). This is the net amount of good 1 demanded by each consumer. At equilibrium prices, this is zero. • Following from the definitions of budget lines, Walras’ law states that the value of aggregate excess demand is zero: p1z1(p1, p2) + p2z2(p1, p2) = 0 • So if the market clears exactly for one of the goods, it must clear exactly for the other