(General Equilibrium and Economic Efficiency (Chapter 16

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Chupter JO 

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لحعجصمح() عا با ‎Vopios‏ ® Gecerd Cyuiibriuw @Oudpsis " GP Pviewy iu Exchange " quip ved CP Pivieury ® GP Rcteuy in Productiva 0۳۷ 1S Oke S 

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لحعجصمح() عا با ‎Vopios‏ © Phe Guies Proow Pree ‏له‎ ® Ong Oveniew--The CCP Piven oF Covwwpetiive Ourkets # Ok Ookhets Pail 0۳۷ 1S Oke SD 

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‎ucsis presuves tht‏ زواجت اشی() ظ نج اطعا اوه وه رت 0 ‎0۳۷ 1S Oke ‎ 

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® Gecerd equilbruc ‏عا صنسصل وراه‎ ۱ ‏ی‎ ic of workets siwutocevusty ond takes the Peedvack ‏ات از تلا‎ 0۳۷ 1S Oke S 

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" Peedback ef Pent is u prive or quantity uduustved ia poe warket caused by prive ‏سرت رون وت‎ ta neloted wurkets. 0۳۷ 1S Oke Oo 

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=D. otercdepecdtedt Ourkets--Oovicry 9 Geverd Cquiibriuc ‏مین و‎ ۰ ‏او ری‎ ۶ ‏او سول‎ * Onvie theater tickets 0۳۷ 1S 6 

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‎Darke:‏ الط هه مر ‎und Orlevoussrtie Qrutks‏ لت" عنه() ‎Orwerd Cudbrine Coder: ‏وبحم مصاع ممح و و‎ ‏سس‎ deco ‏اس‎ ‎ ‎Go ‏سعد زه ‎ ‎Ore be prernord ‏سس‎ 0 $4 toc os ack ‏لاط سس‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ 

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‎und Orlevoussrtie Qrutks‏ لت" عنه() ‎Darke:‏ الط هه مر 

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تعو(ه() ول ججرو هه ‎Vw‏ ‏ع؟) سول مه عس" طنه() ® Observativa ‏ه‎ Ditkout poosidertay the Peedback ePPect witk yeuerd equilbriucy, the ipuct oP the tens would © Dhis is co iepportodt ooosiderciva Por policy wukers. 0۳۷ 1S ۵ 0 

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تعو(ه() ول ججرو هه ‎Vw‏ ‏ع؟) سول مه عس" طنه() ® Qvuestivw © Okt would be the Peedbuack ePPevt oP a tex xpos? © Oko we the polioy ieopiicaives oF ‏ه بصن‎ ۱ 0 ‏و صا لجموموومه جاو‎ ‏یه صاا دز منوت ان‎ 0۳۷ 1S Olde 0 

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The ‏حول موه‎ oP Totercraiocd Qurkets " roa ud the Ouited Grates export ‏هروه‎ ‎ued ure, therePore, ivterdepecdedt. © raul licvited exports ic the bate (QOO’s usd eat) JOT O's. ® Gvecadly the export couteols were to be rewoved, vod (Braziica exports were ] ‏وكمجصودا صا‎ 

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ععوحل جص م ۱ ۵۷( صن ‎oP‏ ® Parti Oasis © Ornited dowestic sopbeo price will Pal ood dowestic deen Por sppbec products would ما 

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The ‏حول موه‎ oP Totercraiocd Qurkets ® Geverd @udsis ‎.G. the price oP sopbeuss urd vulput‏ ار باه و مرن ‎would iaoreuse; (D.G. exports‏ ‎and @roviicg exports would Pall (eved oPter‏ ‎0۳۷ 1S ۵» ‎ 

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)۳۳ ‏مسب‎ tr Cacho ® Gackenp ‏و لت طسو‎ poe vow be wade better oPP without cabsiccy ‏وب اه موه‎ DFP (Pareto er Piviewy). ® Dke @duootages oP ‏ولوس"‎ رای و ‎Prd betwee two ponies‏ و ۳ 

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)۳۳ ‏مسب‎ tr Cacho ۰ Ossucvptiow © Di cowanvers (countries) © Dw wods ‏و‎ otk people kapw euck vikers prePerewes ® Cxokuniiey qoods inuolves zerv iroresuriiod 1770515 © lowes & Koren have g total oP ID units oP Pood ord O units ‏ای ام‎ 0۳۷ 1S ۵» 

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Pre @dvoctage oP Trade مسا و ‎Trae‏ تساه لس ‎edu‏ ‏0,0 48,۲40 40 خلج ‎١‏ حول ‎FF, FC‏ . 4 ۲ بت بات ‎(orn‏ ۰ بجاو ۳ ۳ ۶ 06 و مس ۰ باه 3 لیخ ۴و ‎laces’ ORG‏ ‎(eeu wad dawer ore willing 7 ire: Koro‏ ‎trades 10 Por UP. Oheu te ORG & wt equ,‏ تمه ‎there ip xpta Proc trend. The‏ ‎whe te ORG & equd.‏ حون مشاه مر ع0 عبت ‎1S‏ 0۳۷ 

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)۳۳ ‏مسب‎ tr Cacho 5 ۲ Edeworts vx Oia ® Ohick trades vo ‏ماه انیت هجوت‎ wit be ePRictedt ooo be thustcoted ‏رن‎ ‏)مه لاه رم‎ Box. 0۳۷ 1S ۵۷» 0 

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له حلسم ‎qe ee oF Dy‏ 177 0 ‎١ 0‏ ‎١ 1‏ 1 ! مساك ‎‘Phe tard‏ 3 1 سيل :© جا طحم ‎bePore‏ ‏ی ۵ 0 | ‎ke PP ond 0 & Kara ۱ ١‏ ‎kar OF und SO, ۱ ۲ her PP aed PO, |‏ 1 ۱ 1 1 0 1 ‎١ 1‏ 1 

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)۳۳ ‏مسب‎ tr Cacho 9 GP Pied Ollovatioes OP dawes’s ood Karen's ORG ae the save ut @ the dlocaica ‏.مجو اناج جز‎ ¢ Phis depeuds oo the shupe oP their 0۳۷ 1S Obde SD 

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2 Oke Od Ds ‏اسلا‎ 

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2 سوه 60-66 كيم )۳۳ ‏مسب‎ tr Cacho 4< 0 ۳۳ ‏(مس‎ ‎Wnt: & he ORC equd | ١ 2 4s Ort Ped? Q 27 O,? O° Ds ‏اسلا‎ 

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عمسسا) بط © (Bay ‏با موم چم‎ stad ‏مومت سل نب مه‎ worse DBP (closer ty her ape اس رلسمی ۰ 6 لماج مج جا اجو مسجم لمم لمكا ررمي torr ‏سي‎ مساب ‎ORG te equ‏ ‎todPPereuce curves ore‏ دز ماه ع له یمه اس وه ی 

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)۳۳ ‏مسب‎ tr Cacho 8 ‏ب۲۱/‎ Courant Curve ° Do Ried of possible ef Picicd ‏تساه‎ of Pood vod cothiog between (Koro od dewes, we vould look Por oll points oP tocgeary betweeo ‏ره رز لس عؤصوال خام اوح‎ 0۳۷ 1S Obde OF 

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eee ‎OS‏ ی ‎The Ovdirast Cure ‏له تفت سح ‎ ‎ ‎ ‎ ‎ 

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)۳۳ ‏مسب‎ tr Cacho عمسسیران ® عا مه یمه ‎DH potas oP‏ )0 ی حول ©( .. ‏ی ع‎ core shows ‏له‎ ‎dlocuives that are (Pareto ef Picicdt. «+ Porete ePPicicd docoion vocurs wheo trode will woke sowevur worse oPP. 0۳۷ 1S ‏ی‎ 

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)۳۳ ‏مسب‎ tr Cacho ® Oppiicaica: Mhe policy icoplicaica oP (Pareto Q) 0 Rexwove quote * )0 ‏جوج‎ ysict * Gowe workers lose 9( Gubsidies to the workers thet vost bee thoc the yoiu ty pours 0۳۷ 1S Oke OP 

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)۳۳ ‏مسب‎ tr Cacho ® Cowsuver Cquiibriuc in ao Oowpetiive Ouarket ® Cowpetiive warkets have woop actual or poteoial buyers uc sellers, sv iP people do ut fie the teres oP oo exckoage, they coc took Por carter seer who oPPers better terse. 0۳۷ 1S Oke CO 

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)۳۳ ‏مسب‎ tr Cacho ® Cowsuver Cquiibriuc in ao Oowpetiive Duarket © Phere we woop Uaveses ond Kaew. © Dhep we prive tuhers © Prive oP Pood ed clothiog = ( (retaive prices wil deterxviae trode) وه ی ‎1S‏ 0۳۷ 

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dor Orga: Cock howe baw 

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)۳۳ ‏مسب‎ tr Cacho © Goruriv ‏مه .۵ وه‎ P, =O ‏له مات ۴ 003۵) نپول و‎ ۱ ۰ © Karen's ORG oF chothtcry Por Pood ‏جز‎ ©. ‏.علعصص! احج ارب ول و‎ © CCareu will wort to trode. ‏و‎ Phe worket ts to disequilbrivc. * Gurls oF clothe ¢ Ghortage oP Pood 0۳۷ 1S Obte SE 

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)۳۳ ‏مسب‎ tr Cacho یی 0) "ا ‎Wow would the warket reack equilbrive?‏ © © Wow does the vutoowe Proow the exchorye wit woop people ‏حال‎ Proow the exchooge betwee tw people? 0۳۷ 1S ‏ی‎ 9 

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)۳۳ ‏مسب‎ tr Cacho « ۱۱ Coowwir CPRivieuy vP Covwpetiive Ourkets ‏و با مب و‎ dt poict O (us shows oc the vet cide) that ‏جنشاجدجوحص ه جز وصتمحطان حول‎ ae ‏مط روت‎ 0۳۷ 1S Obde OE 

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)۳۳ ‏مسب‎ tr Cacho ® Obsenuiow powering OC. 0) Giowe the two iedPPerewe vuves we frogeut, the pow peti ‎dlovative is ePPiviect.‏ انوس ‎9( Phe ORG, is equd to the roti oP the prives, or DRG, = PSP» = ORGS ‎1 ‎eo" ‎0۳۷ 1S ‏ی‎ SO ‎ 

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)۳۳ ‏مسب‎ tr Cacho ® Observutives ‏رصم‎ 6۰ 9) OP the todiPPereuce curves were ot focgedt, trode would pour. #) Tre vowpetiive esuilbriuc is uokieved without ictervectiod. 0۳۷ 1S Ore 0 

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)۳۳ ‏مسب‎ tr Cacho ® Obsenuiow powering OC. له مور روموت ‎S) dea‏ wutudly beoePicidl trades will be vow pleted ued the result ‏انوس‎ ‏شمان‎ oP rescues will be eoourwicdly EPP ivicct (ihe First theprew OP wears ecowwire) 0۳۷ 1S Ore 0 

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)۳۳ ‏مسب‎ tr Cacho ۱ Policy Issues © kot is the role oP ‏79س و‎ 0۳۷ 1S Obte SS 

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Gauipy wed 9۳۳ ‏رجوحنح‎ 94s co EP Aiciedt dlocotive oso oo equitable صا ‎kow‏ نید رحس ‎Coouwwists ued others‏ ه 0۳۷ 1S Obde 0 

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Gauipy wed 9۳۳ ‏رجوحنح‎ 2D ke Ottty Possibilities (Prvatier © ‏نب‎ ‎Pike level oP ‏مد اه اه ما مه‎ people uchieve wheu they hove teoded to oa dl dlocaives that are ‏.لمجو تاداع‎ 0۳۷ 1S 9 0 

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Gauipy wed 9۳۳ ‏رجوحنح‎ Korea's EC S& Powe efit. © Cowpaed iy W, 6 & woke vor persou better oPP witout wwohiy the vier worse oPP. hows’ Diy 0۳۷ 1S Obde PS 

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Gauipy wed 9۳۳ ‏رجوحنح‎ Korea's B45 W equittble? ‏ین و‎ the voly choices we EC © Is Boor equitcble? ‘It depeuds va perspevive. © 1B owes tora wy > (Corea’s total iy lowes’ Oty 0۳۷ 1S Obde OF 

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Gquip und GPRicteay B45 W equittble? ‏یبیل و‎ the voly choices we L&C © Is Bove equichle? It depeuds vo perspenive. © Wony be wore equi ‏جوا‎ fe tetas be wore equ, terePore, om lowes’ Oty Obde PS 

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Gauipy wed 9۳۳ ‏رجوحنح‎ " Govid OePare Pucntious © Osed to ‏هباشم ها نجل‎ that ane upplied to ‏عمداص ال و رف خر لصو‎ What is social desirable 0۳۷ 1S Obde 0 

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Cow Otews vF ‏رش‎ حد سوام 8 ‎a‏ © Ol wewbers oP ‏عمجت مج سرت ره‎ oP «pods # Ravtica © Ouxiwize the utility oP the feustuvell-pPP ‏تم‎ 0۳۷ 1S Ore PP 

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Cow Otews vF ‏رش‎ ار © © Duxieize the total utili: oP oll wewbers oP soviet © Darkeroricuted © Phe worket vutoowe is the wost equitable 0۳۷ 1S Ore FO 

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Gauipy wed 9۳۳ ‏رجوحنح‎ ® Dke Goon ‏ولو(‎ Puortiod cod Equity © Gouip is depended ‏ام عرص دجو‎ ‏رم‎ Pro (Cyalitaricc to Darket-orectatiocd. 0۳۷ 1S Obde 9 

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Gauipy wed 9۳۳ ‏رجوحنح‎ ® Gguip ocd PerPeot Cowwpetiiva ‎wowpeitive equilbriuc beads to a Purety‏ 0 و ‎ePRiciedt putoowe that way or sup unt be‏ ‎0۳۷ 1S Obte 0 ‎ 

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Gauipy wed 9۳۳ ‏رجوحنح‎ Koray © Qoicte vo the Procter oe we Pareto ef Piviect. oO) 810, we rete 9, oequal distibuiiras ‏له‎ ‎oreo eFPiviedt. © Do chee eouiy (wore equ distributive) west the dhocativg be ePPiciest? O« 0۳۷ 1S Oke 0 

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Gauipy wed 9۳۳ ‏رجوحنح‎ ® Geoowd Thevrew oP OrPare Covuwwire 041 iadvidud prePereures ure vowwex, hea ey ee 22 aot xpos. 0۳۷ 1S Obte SO 

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Gauipy wed 9۳۳ ‏رجوحنح‎ ® Geoowd Thevrew oP OrPare Covuwwire © Cousider the post oP programs to redistribute feos ord the trode pPP betweeo equity ood ‏رسیم‎ 0۳۷ 1S Obte SO 

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)۳۳ ‏رسب‎ ta Productioa ® Qsanve © iced total supplies vP tur inputs; labor ord vupital © Crodure two products; Pood ood clothe ® Many people owe ond sell inputs ‏و و‎ © ‏یم‎ is dstibuted betwee Pood ocd ‏ناسا‎ 0۳۷ 1S ‏ی‎ 

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)۳۳ ‏رسب‎ ta Productioa © Observations ® Lichoge betwee supply ood dewwoed (eco © Choores ic the prive oP vor faput triggers ‏وس و مر‎ ood decwodd whick potublishes ‏جه‎ Peedback ePPevt. © Ose yeuerd equilbriuc ‏وراه‎ wits Predback ePPevts 0۳۷ 1S Obte SS 

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)۳۳ ‏رسب‎ ta Productioa ® @roduniivd in the Eckewortk Box © The Edqewortk box coo be used ty wecsure iuputs to the productive provess. 0۳۷ 1S Obte SO 

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)۳۳ ‏رسب‎ ta Productioa ‎@roduntivg to the Edgeuortk Box‏ "ل انحو جه خأ بكسي دوا ‎Back unis‏ © ‎kours‏ 90 رها مورا ‎hours‏ 90 راون لسن اه مسجت من و لسع بن ۰ ‎Oj = Clothicry‏ % ‎ ‎0۳۷ 1S Ore SP ‎ 

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)۳۳ ‏رسب‎ ta Productioa ‎Produver quibrive mu Cowper tiie‏ ا" ‎apt Darket‏ ‎® Cowpetiive ‏ل‎ ‎production. ‎0۳۷ 1S Obte SO ‎ 

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)۳۳ ‏رسب‎ ta Productioa ۰ Oovwwpetiive QOurket Observatioas © Phe wane rate (Ww) ued the price oP coptal (r) wll be he ‏لآ را بنج‎ ‎Oinikeize produrticn post‏ و < ,2/۳ +۰ ,۳ < بر + ‎ORNG = slope of the tsogquert‏ © اما ‎Covwpetiive equiibriuc7 is vo the production‏ © رایع راجت ‎Cowpetiive‏ °° ‎0۳۷ 1S ۵» 0 ‎ 

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‎Sov ov 0 00‏ ۵ باه ‎ ‎tet wk‏ موس موی تا ول .0 ست © ط © مب مد ‎Dove be‏ ‎ ‎ ‎ ‎Oe dou 90۳ 90" ‏مرمع‎ 90 ‎ ‎ 

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)۳۳ ‏رسب‎ ta Productioa ‎DP he Production Possibilities Procter‏ "ا ‎Ghows the vorious cowbicaivas oF Pood ced‏ © ‎dotkieg thot coc be produced wit Posed iaputs‏ نی ی موه ‎oF‏ ‏عنصت اعمفمصت جكلا مدصنا لجرفرج() © ‎0۳۷ 1S 605-68 ‎ 

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100 (Ow) 0۳۷ 1S ‏ی‎ 

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0-00۰ 0 ه60 ‎ae‏ (Oras) Obde OF 

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)۳۳ ‏رسب‎ ta Productioa ® Oupu GPRiciewwp © Goods wust be produced of witty post ood people's wihaypaess to pay Por thew. OPP ct ts ‏سح‎ ‏تساه‎ ‎* Ooms where DRG = ORT 0۳۷ 1S ‏لب‎ OS 

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)۳۳ ‏رسب‎ ta Productioa ® Qsanve © ORT = Cad ORT =C © Oocenvers will yive up © clothes Por ( Pood © Oost oF 1 Pood is ( ‏رسای‎ ‎© Dow tithe Pood is bec produced © daoreuse Pood production (DRG Pals urd ORT icoreuses) 0۳۷ 1S Obte SO 

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)۳۳ ‏رسب‎ ta Productioa a GPR ivieay ‏ك1‎ Output Ourkets © Commer’ s Oudeet Blloratica MRS=P./P, © Profit Duxicviziagy Pir P, =MC, andP, =MC, ۰ mer Ge ‏د‎ oa =MRS MG, P, 0۳۷ 1S Oke OO 

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4 ی سوه سوه ‎P= O35‏ !0,20 =,© ‎DRT = DRO; Gy = GoPor‏ ‎Peron hn‏ Obte OS 

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Tre Gute Proow Pree Trade ® Cowpomive @dvootaye © ‏رصن د()‎ 1 kes 0 cowporaive ‏وم رل‎ per pouty © ta procuctay a yood iP the cost oF producicy that yood, retaive to the cost oF productay other qoods, ic (1, ie bauer that the post oF produciag the youd ia O, retaive to te 0۳۷ 1S Ode TO 

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Tre Gute Proow Pree Trade ® Cowpurtive Pdvoctacge © Cowpurtiive udvoctage is u relive weusureweu, unt ubschute. © 0 pouty with oo obsclate ‏رل‎ to the production oP ofl qoods wil oot have a powpendive ‏موزل‎ ia the prooductica oP oll ‏عل وص‎ * Exavple: Wolocd ood Tray produce cheese ued wice 0۳۷ 1S Obde TO 

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Wows oP bubor Required to Produce Cheese Wine (1 Ib.) (1 gal.) 9 0 لاس hy 9 9 AWolkrerd bras oo ubsvhite ‏مرلو‎ to bots products. 0۳۷ 1S Oke TO 

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Wows oP bubor Required to Produce Cheese Wine (1 Ib.) (1 gal.) 9 0 لاس 9 ۱ advackae ‎hd is to cheese: the vost oP cheese‏ وه ‎WO te vost oF woe ond W's cost oP‏ ‎cheese ty twice te vost oP wie.‏ ‎ ‎0۳۷ IO Oe TS ‎ 

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Wows oP bubor Required to Produce Cheese Wine (1 Ib.) (1 gal.) Wokeert 0 oe 41 9 9 Andy's ‏سم مه ‌ممت‎ ‏ماج زیر‎ the cont oP vheree. 0۳۷ IO Otte TH 

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Wows oP bubor Required to Produce Cheese Wine (1 Ib.) (1 gal.) Woke 0 9 teh 9 =) Otkou Trade: Borve PO = PO ta Wold & Indy. ‏لا‎ kar OP bre. oF kbar. wie - 06 ‏طم‎ 6 wax. cheese = OF by. or a ro whites, 0۳۷ 1S Oe 7S 

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Wows oP bubor Required to Produce Cheese Wine (1 Ib.) (1 gal.) Woke 0 9 41 5 5 Otk Trade: dy produces © ud. ocd trodes 0}; comes © bs. und © ‏عابي‎ ‎Otou Trade: 9 bs. on S ya. 0۳۷ 1S Ore TO 

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The GPPRevts ‏عاطامممن() و‎ Ikoport Quotas " ® Chaogiay Ourwobile Market © Aeoports (us u pervedtaye oP dowestic sues) ۰ 98 - 06 ۰ 1900 - 06 ۱ ‏حصب‎ ‏ساره‎ * ‏ج41‎ (900 dapoa exported O.S wiliza cars to the OG. * ‏اس 1996 و‎ the OCR exports Pet to 0.6© wiliza cars. 0۳۷ 1S ۵ TO 

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The 6۳۳ oP Butocovbile Ieoport Quotes ® Decoy the Isppurt oP the OCR () dapeuese vor prives wer veut 50, / in 9690-1089608, ‏له‎ اوه وی .۰6( ‎Dew Por‏ لت ‎O.G. profits by $d bilo‏ 0۳۷ 1S Oke TS 

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The 6۳۳ oP Butocovbile Ieoport Quotes ® Deosuricy the Iepurt oF the OER 9) Cis Dur prices were $OSO io $POO/auto higher theo they would hove beeo without OER, ۲۷ ۷۶ fF) O.G. ses wee by SOO,OOO wots ‏جمس‎ about CO DOO jobs. 0۳۷ 1S Ore OO 

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The GPPRevts ‏عاطامممن() و‎ Ikoport Quotas ® Deasuricy the Inport oP the OER S) Cost|lob = 525 ‏تن‎ (power = $400,000 0۳۷ 1S 9۷» 0 

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OPPeeey lowes ($cc) Quoi ‏وار‎ he Costs oP Proteviiva Prokwer Cac ‏وا عون‎ (صحقمة) 900 ses 87,000 9900 ‏هو‎ ‎980 ‎9,000 ‎4000 (8 willow) 990 99,00 9900 sso 9,000 4,800 Orexne ‏عصر‎ 21 ‏جه وجل‎ opporel ‏اوه مسیون‎ Opler televise حلسم بو 

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@u Overview---The GPPectewy ‏۴و‎ Cowprtive Ouakets ® Cocttiivas Required Por Goowwir © OP cen i Oxckoae MRS. =MR§. ۱ 0۳۷ 1S Ore OS 

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@u Overview---The GPPectewy ‏۴و‎ Cowprtive Ouakets ® Cocttiivas Required Por Goowwir © CP evewy io Cxckuage (Por 9 owt arte) 224 بط 2۲1 ,1/4 ۱ 0۳۷ 1S Oe OF 

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Chapter 16 General Equilibrium and Economic Efficiency Topics to be Discussed  General Equilibrium Analysis  Efficiency in Exchange  Equity and Efficiency  Efficiency in Production Chapter 16 Slide 2 Topics to be Discussed  The Gains from Free Trade  On Overview--The Efficiency of Competitive Markets  Why Markets Fail Chapter 16 Slide 3 General Equilibrium Analysis  Partial equilibrium analysis presumes that activity in one market is independent of other markets. Chapter 16 Slide 4 General Equilibrium Analysis  General equilibrium analysis determines the prices and quantity in all markets simultaneously and takes the feedback effect into account. Chapter 16 Slide 5 General Equilibrium Analysis  A feedback effect is a price or quantity adjustment in one market caused by price and quantity adjustments in related markets. Chapter 16 Slide 6 General Equilibrium Analysis  Two Interdependent Markets--Moving to General Equilibrium  Scenario  The competitive markets of: Videocassette rentals  Movie theater tickets  Chapter 16 Slide 7 Two Interdependent Markets: Movie Tickets and Videocassette Rentals Price Assume the government imposes a $1 tax on each movie ticket. Price S*M General Equilibrium Analysis: Increase in movie ticket prices increases demand for videos. SV SM $3.50 $6.35 $3.00 D’V $6.00 DM Q’M QM Number of Movie Tickets DV QV Q’V Number of Videos Two Interdependent Markets: Movie Tickets and Videocassette Rentals Price The increase in the price of videos increases the demand for movies. Price S*M The Feedback effects continue. SV SM $6.82 $6.75 $3.58 $3.50 $6.35 D*V $3.00 D*M $6.00 D’V D’M DM Q’M Q”M Q*M QM Number of Movie Tickets DV QV Q’V Q*V Number of Videos Two Interdependent Markets: Movie Tickets and Videocassette Rentals  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. Chapter 16 Slide 10 Two Interdependent Markets: Movie Tickets and Videocassette Rentals  Questions  What would be the feedback effect of a tax increase on one of two complementary goods?  What are the policy implications of using a partial equilibrium analysis compared to a general equilibrium in this scenario? Chapter 16 Slide 11 The Interdependence of International Markets  Brazil and the United States export soybeans and are, therefore, interdependent.  Brazil limited exports in the late 1960’s and early 1970’s.  Eventually the export controls were to be removed, and Brazilian exports were expected to increase. Chapter 16 Slide 12 The Interdependence of International Markets  Partial Analysis  Brazilian domestic soybean price will fall and domestic demand for soybean products would increase. Chapter 16 Slide 13 The Interdependence of International Markets  General Analysis  In the U.S. the price of soybeans and output would increase; U.S. exports would increase and Brazilian exports would fall (even after regulations ended). Chapter 16 Slide 14 Efficiency in Exchange  Exchange increases efficiency until no one can be made better off without making someone else worse off (Pareto efficiency).  The Advantages of Trade  Trade between two parties is mutually beneficial. Chapter 16 Slide 15 Efficiency in Exchange  Assumptions  Two consumers (countries)  Two goods  Both people know each others preferences  Exchanging costs goods involves zero transaction  James & Karen have a total of 10 units of food and 6 units of clothing. Chapter 16 Slide 16 The Advantage of Trade Individual Initial Allocation Trade Final Allocation James 7F, 1C -1F, +1C 6F, 2C Karen 3F, 5C +1F, -1C 4F, 4C Karen’s MRS of food for clothing is 3. James’s MRS of food for clothing is 1/2. Karen and James are willing to trade: Karen trades 1C for 1F. When the MRS is not equal, there is gain from trade. The economically efficient allocation occurs when the MRS is equal. Chapter 16 Slide 17 Efficiency in Exchange  The Edgeworth Box Diagram  Which trades can occur and which allocation will be efficient can be illustrated using a diagram called an Edgeworth Box. Chapter 16 Slide 18 Exchange in an Edgeworth Box 10F 4F Karen’s Food 3F 0K 6C The initial allocation before trade is A: James has 7F and 1C & Karen has 3F and 5C. The allocation after trade is B: James has 6F and 2C & Karen has 4F and 4C. James’s Clothing Karen’s Clothing B 2C 4C +1C 1C -1F 5C A 6C 0J 6F James’s Food 7F 10F Efficiency in Exchange  Efficient Allocations  If James’s and Karen’s MRS are the same at B the allocation is efficient.  Chapter 16 This depends on the shape of their indifference curves. Slide 20 Efficiency in Exchange 10F Karen’s Food 0K 6C James’s Clothing A: UJ1 = UK1, but the MRS is not equal. All combinations in the shaded area are preferred to A. D Karen’s Clothing C UJ3 B Gains from trade 0J Chapter 16 James’s Food A UK3 UK2 UJ 2 UJ 1 6C UK 1 10F Slide 21 Efficiency in Exchange 10F Karen’s Food 0K 6C Is B efficient? Hint: is the MRS equal at B? James’s Clothing D Karen’s Clothing C Is C efficient? and D? UJ3 B A 0J Chapter 16 UK3 UK2 James’s Food UJ 2 UJ 1 6C UK 1 10F Slide 22 Efficiency in Exchange  Efficient Allocations     Chapter 16 Any move outside the shaded area will make one person worse off (closer to their origin). B is a mutually beneficial trade--higher indifference curve for each person. 10F 6C Karen’s Food D James’s Clothing Karen’s Clothing C U J3 B Trade may be beneficial but not efficient. MRS is equal when indifference curves are tangent and the allocation is efficient. 0K UJ2 UJ1 UK1 A 0J U K 3 UK 2 James’s Food 6C 10F Slide 23 Efficiency in Exchange  The Contract Curve find all possible efficient allocations of food and clothing between Karen and James, we would look for all points of tangency between each of their indifference curves.  To Chapter 16 Slide 24 The Contract Curve E, F, & G are Pareto efficient . If a change improves efficiency, everyone benefits. Karen’s Food 0K Contract Curve G James’s Clothing F Karen’s Clothing E 0J Chapter 16 James’s Food Slide 25 Efficiency in Exchange  Observations 1) All points of tangency between the indifference curves are efficient. 2) The contract curve shows all allocations that are Pareto efficient.  Chapter 16 Pareto efficient allocation occurs when trade will make someone worse off. Slide 26 Efficiency in Exchange  Application: The policy implication of Pareto efficiency when removing import quotas: 1) Remove quotas  Consumers gain  Some workers lose 2) Subsidies to the workers that cost less than the gain to consumers Chapter 16 Slide 27 Efficiency in Exchange  Consumer Equilibrium in a Competitive Market  Competitive markets have many actual or potential buyers and sellers, so if people do not like the terms of an exchange, they can look for another seller who offers better terms. Chapter 16 Slide 28 Efficiency in Exchange  Consumer Equilibrium in a Competitive Market  There  They are many Jameses and Karens. are price takers  Price of food and clothing = 1 (relative prices will determine trade) Chapter 16 Slide 29 Competitive Equilibrium Karen’s Food 10F 0K 6C PP’ is the price line and shows possible combinations; slope is -1 Begin at A: Each James buys 2C and sells 2F Each James would move from Uj1 to Uj2, which is preferred (A to C). Price Line P James’s Clothing Karen’s Clothing C Begin at A: Each Karen buys 2F and sells 2C. Each Karen would move from UK1 to UK2, which is preferred (A to C). UJ2 A UK 2 0J James’s Food U K1 UJ1 P’ 6C 10F Competitive Equilibrium Karen’s Food 10F 0K 6C Price Line At the prices chosen: Quantity food demanded (Karen) equals quantity food supplied (James)--competitive equilibrium. P James’s Clothing Karen’s Clothing C At the prices chosen: Quantity clothing demanded (James) equals quantity clothing supplied (Karen) --competitive equilibrium. UJ2 A UK 2 0J James’s Food U K1 UJ1 P’ 6C 10F Efficiency in Exchange  Scenario P F and PC = 3  James’s MRS of clothing for food is 1/2.  Karen’s MRS of clothing for food is 3.  James will not trade.  Karen will want to trade.  The market is in disequilibrium.  Surplus of clothing  Shortage of food Chapter 16 Slide 32 Efficiency in Exchange  Questions  How would the market reach equilibrium?  How does the outcome from the exchange with many people differ from the exchange between two people? Chapter 16 Slide 33 Efficiency in Exchange  The Economic Efficiency of Competitive Markets can be seen at point C (as shown on the next slide) that the allocation in a competitive equilibrium is economically efficient.  It Chapter 16 Slide 34 Competitive Equilibrium Karen’s Food 10F 0K 6C Price Line P James’s Clothing Karen’s Clothing C UJ2 A UK 2 0J Chapter 16 James’s Food U K1 UJ1 P’ 6C 10F Slide 35 Efficiency in Exchange  Observations concerning C: 1) Since the two indifference curves are tangent, the competitive equilibrium allocation is efficient. 2) Chapter 16 The MRSCF is equal to the ratio of the prices, or MRSJFC = PC/PF = MRSKFC. Slide 36 Efficiency in Exchange  Observations concerning C: 3) If the indifference curves were not tangent, trade would occur. 4) The competitive equilibrium is achieved without intervention. Chapter 16 Slide 37 Efficiency in Exchange  Observations concerning C: 5) In a competitive marketplace, all mutually beneficial trades will be completed and the resulting equilibrium allocation of resources will be economically efficient (the first theorem of welfare economics) Chapter 16 Slide 38 Efficiency in Exchange  Policy Issues  What Chapter 16 is the role of government? Slide 39 Equity and Efficiency  Is an efficient allocation also an equitable allocation?  Economists and others disagree about how to define and quantify equity. Chapter 16 Slide 40 Equity and Efficiency  The Utility Possibilities Frontier  Indicates the level of satisfaction that each of two people achieve when they have traded to an efficient outcome on the contract curve. all Chapter 16 allocations that are efficient. Slide 41 Utility Possibilities Frontier *Any point inside the frontier (H) is inefficient. *Combinations beyond the frontier (L) are not obtainable. Karen’s Utility OJ Lets compare H to E and F. L E F *Movement from one combination to another (E to F) reduces one persons utility. *All points on the frontier are efficient. H G OK James’s Utility Chapter 16 Slide 42 Equity and Efficiency  E & F are efficient.  Compared to H, E & F make one person better off without making the other worse off. Karen’s Utility OJ E F H G OK James’s Utility Chapter 16 Slide 43 Equity and Efficiency  Is H equitable?  Assume the only choices are H & G Karen’s Utility OJ E G more equitable? It depends on perspective.  Is  At G James total utility > Karen’s total utility F H G OK James’s Utility Chapter 16 Slide 44 Equity and Efficiency  Is H equitable? the only choices are H & G Karen’s Utility  Assume OJ G more equitable? It depends on perspective.  Is  H may be more equitable because the distribution is more equal, therefore, an inefficient allocation may be more equitable. E F H G OK James’s Utility Chapter 16 Slide 45 Equity and Efficiency  Social Welfare Functions  Used to describe the particular weights that are applied to each individual’s utility in determining what is socially desirable Chapter 16 Slide 46 Four Views of Equity  Egalitarian  All members of society receive equal amounts of goods  Rawlsian  Maximize Chapter 16 the utility of the least-well-off person Slide 47 Four Views of Equity  Utilitarian  Maximize the total utility of all members of society  Market-oriented  The Chapter 16 market outcome is the most equitable Slide 48 Equity and Efficiency  The Social Welfare Function and Equity  Equity is dependent on a normative priority ranging from Egalitarian to Market-orientation. Chapter 16 Slide 49 Equity and Efficiency  Equity and Perfect Competition A competitive equilibrium leads to a Pareto efficient outcome that may or may not be equitable. Chapter 16 Slide 50 Equity and Efficiency  Points on the frontier are Pareto efficient. O J & OK are perfect unequal distributions and Pareto efficient. Karen’s Utility OJ  To achieve equity (more equal distribution) must the allocation be efficient? OK James’s Utility Chapter 16 Slide 51 Equity and Efficiency  Second Theorem of Welfare Economics  If individual preferences are convex, then every efficient allocation is a competitive equilibrium from some initial allocation of goods. Chapter 16 Slide 52 Equity and Efficiency  Second Theorem of Welfare Economics  Consider the cost of programs to redistribute income and the trade off between equity and efficiency. Chapter 16 Slide 53 Efficiency in Production  Assume  Fixed total supplies of two inputs; labor and capital  Produce  Many two products; food and clothing people own and sell inputs for income  Income is distributed between food and clothing Chapter 16 Slide 54 Efficiency in Production  Observations  Linkage between supply and demand (income and expenditures)  Changes in the price of one input triggers changes in income and demand which establishes a feedback effect.  Use general equilibrium analysis with feedback effects Chapter 16 Slide 55 Efficiency in Production  Production in the Edgeworth Box  The Edgeworth box can be used to measure inputs to the production process. Chapter 16 Slide 56 Efficiency in Production  Production in the Edgeworth Box  Each axis measures the quantity of an input  Horizontal: Labor, 50 hours  Vertical: Capital, 30 hours  Origins Chapter 16 measure output  OF = Food  OC = Clothing Slide 57 Efficiency in Production 50L 30K Efficiency Labor in clothing production A is inefficient is preferred to A20L 40L Shaded area 30L B and C are efficient The production contract curve shows all combinations that are efficient 25 C 20K Capital in food production 10C 10L 0C 80 F D 10K 30 C Capital in clothing production C Each point measures inputs 10K to the production A: 35L and 5K--Food B: 15L and 25K--Clothing Each isoquant shows input combinations for a given output Food: 50, 60, & 80 Clothing: 10, 25, & 30 0F 10L B 20K A 20L Labor in Food Production 30L 50 40LF 60 F 30K 50L Efficiency in Production  Producer Equilibrium in a Competitive Input Market  Competitive markets create a point of efficient production. Chapter 16 Slide 59 Efficiency in Production  Competitive Market Observations  The wage rate (w) and the price of capital (r) will be the same for all industries.  Minimize production cost  MPL/MPK = w/r  w/r = MRTSLK  MRTS = slope of the isoquant  Competitive equilibrium is on the production contract curve.  Competitive equilibrium is efficient. Chapter 16 Slide 60 Efficiency in Production 50L Labor in clothing production 30L 20L 10L 40L 0C 30K 80 F 25 C 20K Capital in food production 10C D 10K 30 C Capital in clothing production C B 10K Discuss the adjustment process that would Move the producers from A to B or C. 0F 10L 20K A 20L Labor in Food Production 30L 50 40LF 60 F 30K 50L Efficiency in Production  The Production Possibilities Frontier  Shows the various combinations of food and clothing that can be produced with fixed inputs of labor and capital.  Derived Chapter 16 from the contract curve Slide 62 Production Possibilities Frontier Clothing (units) 60 Why is the production possibilities frontier downward sloping? Why is it concave? OF B, C, & D are other possible combinations. B A OF & OC are extremes. C A is inefficient. ABC triangle is also inefficient due to labor market distortions. D OC 100 Chapter 16 Food (Units) Slide 63 Production Possibilities Frontier Clothing (units) 60 OF B 1C 1F MRT = MCF/MCC B D A The marginal rate of transformation (MRT) is the slope of the frontier at each point. C 2C 1F D OC 100 Chapter 16 Food (Units) Slide 64 Efficiency in Production  Output Efficiency must be produced at minimum cost and must be produced in combinations that match people’s willingness to pay for them.  Goods Chapter 16  Efficient output and Pareto efficient allocation  Occurs where MRS = MRT Slide 65 Efficiency in Production  Assume  MRT = 1 and MRT = 2  Consumers will give up 2 clothes for 1 food  Cost of 1 food is 1 clothing  Too little food is being produced  Increase food production (MRS falls and MRT increases) Chapter 16 Slide 66 Output Efficiency Clothing (units) How do you find the MRS = MRT combination with many consumers who have different indifference curves? MRS = MRT 60 Production Possibilities Frontier Indifference Curve C 100 Chapter 16 Food (Units) Slide 67 Efficiency in Production  Efficiency in Output Markets  Consumer’s Budget Allocation MRSPF PC  Profit Maximizing Firm PF MCF andPC MCC MCF PF  MRT  MRS MCC PC Chapter 16 Slide 68 Competition and Output Efficiency Clothing (units) PF1 / PC1 MRT@ A(C1, F1) 60 A C1 A shortage of food and surplus of clothing causes the price of food to increase and the price of clothing to decrease. B C2 U2 C C* U1 F1 Chapter 16 F* F2 100 Adjustment continues until PF = PF* and PC = PC*; MRT = MRS; QD = QS for food and clothing. Food (Units) Slide 69 The Gains from Free Trade  Comparative Advantage  Country 1 has a comparative advantage over country 2 in producing a good if the cost of producing that good, relative to the cost of producing other goods, in 1, is lower that the cost of producing the good in 2, relative to the cost of producing other goods in 2. Chapter 16 Slide 70 The Gains from Free Trade  Comparative Advantage  Comparative advantage is a relative measurement, not absolute. country with an absolute advantage in the production of all goods will not have a comparative advantage in the production of all goods. A  Chapter 16 Example: Holland and Italy produce cheese and wine Slide 71 Hours of Labor Required to Produce Cheese (1 lb.) Wine (1 gal.) Holland 1 2 Italy 6 3 Holland has an absolute advantage in both products. Chapter 16 Slide 72 Hours of Labor Required to Produce Cheese (1 lb.) Wine (1 gal.) Holland 1 2 Italy 6 3 Holland’s comparative advantage over Italy is in cheese: the cost of cheese is 1/2 the cost of wine and Italy’s cost of cheese is twice the cost of wine. Chapter 16 Slide 73 Hours of Labor Required to Produce Cheese (1 lb.) Wine (1 gal.) Holland 1 2 Italy 6 3 Italy’s comparative advantage is wine, which is half the cost of cheese. Chapter 16 Slide 74 Hours of Labor Required to Produce Cheese (1 lb.) Wine (1 gal.) Holland 1 2 Italy 6 3 Without Trade: Assume PW = PC in Holland & Italy. Holland has 24 hrs. of labor--max. wine = 12 gals & max. cheese = 24 lbs. or a combination Chapter 16 Slide 75 Hours of Labor Required to Produce Cheese (1 lb.) Wine (1 gal.) Holland 1 2 Italy 6 3 Chapter 16 With Trade: Italy produces 8 gal. and trades 6; consumes 6 lbs. and 2 gals. Without Trade: 3 lbs. and 2 gals. Slide 76 The Gains from Trade Cheese (pounds) CB World prices Pre-trade prices Without trade: production & consumption at A in Holland. MRT = Pw/PC = 2 With trade (assume relative price Pw = PC): Produce at B, MRT = 1 B Consumption at D after trade. Holland imports the wind and exports cheese. A D CD U2 Who gains and who loses from trade? WB Chapter 16 U1 WD Wine (gallons) Slide 77 The Effects of Automobile Import Quotas  A Changing Automobile Market  Imports (as a percentage of domestic sales)  1965 -- 6.1%  1980 -- 28.8%  In 1981 a voluntary export restraint (VER) was negotiated. In 1980 Japan exported 2.5 million cars to the U.S.  In 1981 with the VER exports fell to 1.68 million cars.  Chapter 16 Slide 78 The Effects of Automobile Import Quotas  Measuring the Impact of the VER 1) Japanese car prices rose nearly $1,000/car in 1981-1982, and revenue increase by $2 billion. 2) Chapter 16 Demand for U.S. cars increased U.S. profits by $10 billion Slide 79 The Effects of Automobile Import Quotas  Measuring the Impact of the VER 3) U.S. car prices were $350 to $400/auto higher than they would have been without VER, or consumers were worse off by $3 billion . 4) U.S. sales rose by 500,000 units creating about 26,000 jobs. Chapter 16 Slide 80 The Effects of Automobile Import Quotas  Measuring the Impact of the VER 5) Cost/Job = $4.3 billion (consumer cost)/26,000 jobs) = $160,000 Chapter 16 Slide 81 Quantifying the Costs of Protection Industry Book manufacturing Orange juice Textiles an apparel Carbon steel Color televisions Sugar Dairy products Meat Producer Gains ($ millions) Consumer Losses ($millions) Efficiency Losses ($millions) 305 500 29 390 22,000 3,800 190 550 5,000 1,600 525 27,000 6,800 420 930 5,500 1,800 130 4,850 330 7 130 1,370 145 An Overview---The Efficiency of Competitive Markets  Conditions Required for Economic Efficiency  Efficiency in Exchange J FC K FC MRS MRS Chapter 16 Slide 83 An Overview---The Efficiency of Competitive Markets  Conditions Required for Economic Efficiency  Efficiency in Exchange (for a competitive market) J FC K FC MRS PF / PC MRS Chapter 16 Slide 84 An Overview---The Efficiency of Competitive Markets  Conditions Required for Economic Efficiency  Efficiency in the Use of Inputs in Production F LK C LK MRTS MRTS Chapter 16 Slide 85 An Overview---The Efficiency of Competitive Markets  Conditions Required for Economic Efficiency  Efficiency in the Use of Inputs in Production (for a competitive market) F LK C LK MRTS w/ r MRTS Chapter 16 Slide 86 An Overview---The Efficiency of Competitive Markets  Conditions Required for Economic Efficiency  Efficiency in the Output Market MRTFC MRSFC (forallconsumers Chapter 16 Slide 87 An Overview---The Efficiency of Competitive Markets  Conditions Required for Economic Efficiency  Efficiency in the Output Market (in a competitive market) PF MCF , PC MCC MRTFC MCF / MCC PF / PC Chapter 16 Slide 88 An Overview---The Efficiency of Competitive Markets  Conditions Required for Economic Efficiency  However, consumers maximize their satisfaction in competitive markets only if PF / PC MRSFC (forallconsumer Therefore, MRSFC MRTFC Chapter 16 Slide 89 Why Markets Fail  Market Power  In a monopoly in a product market, MR < P MC = MR Lower output than a competitive market Resources Inefficient Chapter 16 allocated to another market allocation Slide 90 Why Markets Fail  Market Power  Monopsony Restricted w f in the labor market supply of labor in food would rise, wL would fall Clothing input: MRTSCLK wc / r Food inputF: MRTSLK wF / r  wc / r MRTSCLK Chapter 16 Slide 91 Why Markets Fail  Incomplete Information  Lack of information creates a barrier to resource mobility.  Externalities  When consumption or production creates cost and benefits to third parties which changes the cost and benefits of decisions and create inefficiencies. Chapter 16 Slide 92 Why Markets Fail  Public Good  Markets undersupply public goods because of difficulty associated with measuring consumption. Chapter 16 Slide 93 Summary  Partial equilibrium analyses of markets assume that related markets are unaffected, while general equilibrium analyses examine all markets simultaneously.  An allocation is efficient when no consumer can be made better off by trade without making someone else worse off. Chapter 16 Slide 94 Summary  A competitive equilibrium describes a set of prices and quantities, so that when each consumer chooses his or her most preferred allocation, the quantity demanded is equal to the quantity supplied in every market.  The utility possibilities frontier measures all efficient allocations in terms of the levels of utility that each person achieves. Chapter 16 Slide 95 Summary  Because a competitive equilibrium need not be equitable, the government may wish to help redistribute wealth from rich to poor.  An allocation of production inputs is technically efficient if the output of one good cannot be increased without increasing the output of some other good. Chapter 16 Slide 96 Summary  The production possibilities frontier measures all efficient allocations in terms of the levels of output that can be produced with a given combination of inputs.  Efficiency in the allocation of goods to consumers is achieved only when the MRS of one good for another in consumption is equal to the MRT of one good for another in production. Chapter 16 Slide 97 Summary  Free international trade expands a country’s production possibilities frontier.  Competitive markets may be inefficient for one or more of four reasons. Chapter 16 Slide 98 End of Chapter 16 General Equilibrium and Economic Efficiency