【正文】 rve H – inefficient – can do better in shaded area L unobtainable 169。2020 Pearson Education, Inc. Chapter 16 51 Consumer Equilibrium in a Competitive Market ? Competitive equilibrium 1. Because the indifference curves are tangent, all MRSs are equal between consumers 2. Because each indifference curve is tangent to the price line, each person’s MRS is equal to the price ratio of the two goods KFCFCJFC M R SPPM R S ??169。2020 Pearson Education, Inc. Chapter 16 47 Consumer Equilibrium in a Competitive Market ?Disequilibrium is only temporary in a petitive market ?Excess demand will cause price to rise ?Excess supply will cause price to fall ?In our example, we have excess supply of clothing and excess demand of food ?Should expect the price of food to increase relative to price of clothing ?Prices adjust until equilibrium is reached 169。2020 Pearson Education, Inc. Chapter 16 44 Consumer Equilibrium in a Competitive Market Price Line 10F 0K 0J 6C 10F 6C James’ Clothing Karen’s Clothing Karen’s Food James’ Food C A Begin at A: Each James buys 2C and sells 2F moving from UJ1 to UJ2, which is preferred (A to C). Begin at A: Each Karen buys 2F and sells 2C moving from UK1 to UK2, which is preferred (A to C). P P’ UJ2 UJ1 UK1 UK2 169。2020 Pearson Education, Inc. Chapter 16 40 Efficiency in Exchange ?US consumers would be better off and after a time, the US workers are no worse off and might be better off ?Package will increase efficiency ?Efficiency, therefore, can be reached when the bined set of changes leaves someone better off and no one worse off 169。2020 Pearson Education, Inc. Chapter 16 37 The Contract Curve 0J James’ Clothing Karen’s Clothing 0K Karen’s Food James’ Food E F G Contract Curve E, F, amp。2020 Pearson Education, Inc. Chapter 16 33 A: UJ1 = UK1, but the MRS is not equal. All binations in the shaded area are preferred to A. Karen’s Clothing Karen’s Food UK1 James’s Clothing James’s Food UJ1 Efficiency in Exchange 10F 0K 0J 6C 10F 6C Gains from trade A 169。2020 Pearson Education, Inc. Chapter 16 29 Efficient Allocations ?James’ indifference curves are drawn as we usually see them ?Karen’s indifference curves are rotated 180o convex to her axis ?The indifference curves that go through point A have different slopes and therefore different MRSs ?The allocation is not efficient 169。 Karen has 3F and 5C. 169。2020 Pearson Education, Inc. Chapter 16 23 The Edgeworth Box Diagram ?A diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes is called an Edgeworth Box 169。 unit of clothing for 1 unit of food ?Actual terms of trade are determined through bargaining ?Trade for 1 unit of food will fall between 189。2020 Pearson Education, Inc. Chapter 16 19 The Advantage of Trade ?Karen has a lot of clothing and little food ?MRS of food for clothing is 3 ?To get 1 unit of food, she will give up 3 units of clothing ?James’ MRS of food for clothing is only 189。2020 Pearson Education, Inc. Chapter 16 15 Efficiency in Exchange ?We showed before that petitive markets are efficient because consumer and producer surpluses are maximized ?We can study this in more detail by examining an exchange economy ?Market in which two or more consumers trade two goods among themselves ?Same for two countries 169。2020 Pearson Education, Inc. Chapter 16 11 Reaching General Equilibrium ?Must be able to determine the equilibrium price of both movies and DVDs simultaneously ?We must simultaneously find two prices that equate quantity demanded and quantity supplied in all related markets ?The requires finding the solution to four equations: demand and supply for DVDs and movies 169。2020 Pearson Education, Inc. Chapter 16 7 Two Interdependent Markets – Moving to General Equilibrium ?Scenario ?Equilibrium price of movies is $ ?Equilibrium price of DVD rentals is $ ?Government places a $ tax on each movie ticket ?Need to look at effect of tax on ? Market for DVDs ? Feedback effects in movie market 169。2020 Pearson Education, Inc. Chapter 16 3 Topics to be Discussed ?The Gains from Free Trade ?An Overview: The Efficiency of Competitive Markets ?Why Markets Fail 169。2020 Pearson Education, Inc. Chapter 16 2 Topics to be Discussed ?General Equilibrium Analysis ?Efficiency in Exchange ?Equity and Efficiency ?Efficiency in Production 169。2020 Pearson Education, Inc. Chapter 16 6 Two Interdependent Markets – Moving to General Equilibrium ?Scenario ?The petitive markets of: ? DVD rentals ? Movie theater tickets ?These goods are substitutes ?Changing prices in one market are likely to affect the other market 169。2020 Pearson Education, Inc. Chapter 16 10 Two Interdependent Markets – Movies and DVDs ?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 ?You can check for yourself that in the market for plements, the tax would be overestimated 169。2020 Pearson Education, Inc. 14 Soybean Exports – Brazil and US 169。2020 Pearson Education, Inc. Chapter 16 18 The Advantage of Trade Individual Initial Allocation Trade Final Allocation James 7F, 1C 1F, +1C 6F, 2C Karen 3F, 5C +1F, 1C 4F, 4C ?To determine if they are better off, we need to know the preferences for food and clothing 169。2020 Pearson Education, Inc. Chapter 16 20 The Advantage of Trade ?There is room for trade ?James values clothing more than Karen ?Karen values food more than James ?Karen is willing to give up 3 units of clothing to get 1 unit of food, but James is willing t