【正文】 table allocation 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 49 Consumer Equilibrium in a Competitive Market ?In a general equilibrium setting where all markets are perfectly petitive, we can show the same result ?Best example of Adam Smith’s invisible hand ?Economy will automatically allocate all resources efficiently without need for regulatory control ? Supports argument for less government intervention and more highly petitive markets 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 46 Consumer Equilibrium in a Competitive Market ?Not all prices lead to equilibrium ?If the MRSs of the players are not equal, then we are not in equilibrium ?If the price of food is 1 and price of clothing is 3: ?James is unwilling to trade, MRS = 189。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 42 Consumer Equilibrium in a Competitive Market ?There are many Jameses and Karens ?They are price takers ?Relative price of food and clothing = 1 ?Trade depends on relative prices, not actual prices 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 38 Contract Curve ?All points of tangency between the indifference curves are efficient ?MRS of individuals is the same ?No more room for trade ?The contract curve shows all allocations that are Pareto efficient ?Pareto efficient allocation occurs when further trade will make someone 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 35 Efficiency in Exchange ? Any move outside the shaded area will make one person worse off (closer to their origin) ? B is a mutually beneficial tradehigher indifference curve for each person ? Trade may be beneficial but not efficient ? MRS is equal when indifference curves are tangent and the allocation is efficient A Karen’s Clothing Karen’s Food UK1 UK2 UK3 James’ Clothing James’ Food UJ1 UJ2 UJ3 B C D 10F 0K 0J 6C 10F 6C 169。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 31 Efficient Allocations ?We can see both parties are better off at point B since they both end up on a higher indifference curve ?Not efficient since MRSs are different – indifference curves have different slopes ?Although a trade might make both parties better off, the new allocation is not necessarily efficient 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 4F and 4C. 4F 6F +1C 1F 2C 4C B 169。 Karen has 3F and 5C. 169。2020 Pearson Education, Inc. Chapter 16 25 The Edgeworth Box Diagram ?Each point describes the market baskets of both consumers ?James’ basket is read from origin OJ ?Karen’s basket is read from origin OK, in the reverse direction ?James has 7 units of food and 1 unit of clothing – point A ?Karen has 3 units of food and 5 units of clothing – point A from different axis 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。2020 Pearson Education, Inc. Chapter 16 21 The Advantage of Trade ?Suppose Karen offers James 1 unit of clothing for 1 unit of food ?James will have more clothing, which he values more than food ?Karen will have more food, which she values more ?Whenever two consumers’ MRSs are different, there is room for mutually beneficial trade ?Allocation of resources is inefficient 169。 unit of clothing for 1 unit of food ?Actual terms of trade are determined thro