1) Meaning: partial vs general equilibrium
Partial equilibrium
Analyzes one market in isolation (other markets assumed unchanged), e.g., demand-supply in wheat market.
General equilibrium
Studies simultaneous equilibrium in all related markets because markets are interconnected through:
- shared resources (inputs),
- consumer budgets,
- substitution across goods.
Key idea: A change in one market can affect others; GE captures the economy-wide interactions.
2) Basic structure of a GE model (intro level)
A general equilibrium system usually includes:
- Consumers with preferences and endowments/income
- Firms with technologies
- Markets for goods and factors
- Prices that adjust to clear all markets
Equilibrium occurs when:
- Consumers maximize utility subject to budget constraints
- Firms maximize profit (or minimize cost)
- All markets clear: demand = supply for every good/factor
3) Two-good, two-consumer exchange economy (Edgeworth box intuition)
A standard GE starting point is pure exchange (no production):
- Two consumers: A and B
- Two goods: X and Y
- Fixed total endowment of X and Y
The Edgeworth box shows all possible allocations of the two goods between the two consumers.
3.1 Indifference curves in the box
- Each consumer has an indifference map.
- Points where ICs are tangent represent Pareto efficient allocations.
3.2 Contract curve
The set of all Pareto efficient allocations (tangency points) is the contract curve.
4) Pareto efficiency (core welfare concept)
An allocation is Pareto efficient if no one can be made better off without making someone else worse off.