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Microeconomics Corso E

This week's microeconomics course covers Chapter 8, focusing on the essential concept of the Edgeworth Box for studying exchange efficiency and fairness. Dive into scenarios with different preferences and endowments, exploring the contract curve, competitive equilibrium, and Pareto efficiency. Learn how price-taking behavior leads to optimal allocations and the importance of individual choices in achieving a Pareto efficient outcome. Get ready to grasp the fundamentals of microeconomic theory with practical exercises and insights.

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Microeconomics Corso E

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  1. MicroeconomicsCorso E John Hey

  2. This Week • Tuesday with Daria: • Exercise 2: useful for the future. • Later (I am asking for more time) • Exercise 2b: useful for this course (and the exams!) • Wednesday: Chapter 8 (the most beautiful and important of the course). • Thursday: Chapter 10.

  3. Chapter 8 • This chapter introduces the Edgeworth Box... ... the most important concept in the course. • Used for studying exchange between two individuals. • We look for an efficient exchange and we ask about fairness.

  4. Chapter 8 • We begin with a society of two individuals with Cobb-Douglas preferences over two goods: Good 1 and Good 2. • Individual A with parameter a = 0.7. • Individual B with parameter a = 0.6. • Individual A has an endowment of 22 of Good 1 and of 92 of Good 2. • Individual B has an endowment of 128 of Good 1 and 8 of Good 2.

  5. The initial allocation

  6. Chapter 8 • The contract curve is... ... the locus of allocations efficient in the sense of Pareto. • An allocation off the curve is inefficient. • An allocation on the curve is efficient.

  7. Initial allocations

  8. The Competitive Equilibrium

  9. The Competitive Equilibrium

  10. Chapter 8 • The second scenario with different preferences: • Individual A with parameter a = 0.7. • Individual B with parameter a = 0.3. • Individual A has an endowment of 22 of Good 1 and 92 of Good 2. • Individual B has an endowment of 128 of Good 1 and 8 of Good 2.

  11. Summary • The contract curve shows the allocations that are efficient in the sense of Pareto. • There always exist the possibility of mutually advantageous exchange if preferences are different and/or endowments are different. • ‘Price-taking behaviour’ is always Pareto efficient. • If one of the individuals chooses the price the allocation is not Pareto efficient. • Perfect competitive equilibrium (with both individuals taking the price as given) always leads to a Pareto efficient allocation.

  12. Chapter 8 • The competitive equilibrium depends on the preferences and the endowments.

  13. Chapter 8 • Goodbye!

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