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Updated: 21 March, 2007 MICRO ECONOMICS (ECON 601) Lecture 3 Topics to be covered: a. General Competitive Equilibrium b. Edgeworth Box Diagram c. Efficient Allocations d. Production Possibility Frontier e. Rate of Product Transformation f. Determination of Equilibrium Prices g. Real Cost Reduction h. General Equilibrium Modelling i. The Corn Laws Debate j. Existence of General Equilibrium Prices k. Walrasian Solution l. Walras Law m. Definition of Economic Efficiency n. Efficiency in Production
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  Updated: 21 March, 2007 MICRO ECONOMICS(ECON 601)Lecture 3 Tp!c t #e c$ered:a% &e'era Cpet!t!$e E*u!!#r!u#% Ed+erth -. /!a+rac% E!c!e't cat!' d% rduct!'  !#!!t 4r't!ere% Rate  rduct Tra' rat!'% /eter!'at!'  E*u!!#r!u r!ce +% Rea C t Reduct!'h% &e'era E*u!!#r!u Mde!'+!% The Cr' La /e#ate 5% E.! te'ce  &e'era E*u!!#r!u r!ce % ara !a' Sut!'% ara La% /e!'!t!'  Ec'!c E!c!e'c'% E!c!e'c !' rduct!'% E!c!e't Ch!ce  I'put r a S!'+e 4!rp% E!c!e't cat!'  Re urce a'+ 4!r r% E!c!e't Ch!ce  Output # 4!r % Ther  Cparat!$e d$a'ta+e 0  ECON 601 N!ch ' Chapter 12&e'era Cpet!t!$e E*u!!#r!u Partial Equilibrium AnalysisInitial Price Quantity (P 1 , Q 1 )If sometin! causes te eman for # to increase, ten a ne$ equilibrium is reace at (P % , Q % )&'o$eer for te quantity sulie to increase te factors of ro uction tat ro uce ∆ # must come from some$ere else&*e resources tat ro uce !reater suly of # are equal to te resources release from + $en  ro uction fell from Q +1  to Q +% & I La  O'e r!ce  A omo!eneous !oo tra es at te same rice no matter $o buys it or $ic firm sells it& Q # O - 0 - 1 P . P 1 P % Q 1 Q % / Q + O - P +1 P +% Q +% Q +1 / 1 / 0 P + 1  II  upt!' a#ut erect Cpet!t!': ar!e number of buyers of eac !oo & Eac erson ta2es all rices as !ien, ma.imi3es utility sub4ect to a bu !et constraint&ar!e number of firms ro ucin! eac !oo & 5irms ma.imi3e rofits all rices, bot outut an inut rices, are !ien to eac firm& III &e'era E*u!!#r!u $!a Ed+erth -. /!a+ra Assumtions1&All in ii uals ae same references%&*$o !oo s #  +7&*$o factors of ro uction 8  9&5i.e amounts of 8  &A is any ro uction oint tat uses u all te factors& E!c!e't cat!' !' rduct!' ACaital use in #Caital use in +O # O + abor use in #abor use in +*otal abor     *  o   t  a   l   C  a  )   i   t  a   l %  A is not an efficient oint (# % , + % ) at P %  can ro uce same # %  but ro uce more + 7  at P 7  can  ro uce same + %  but at same time ro uce more # 7 &*e locus of te oints P 1 , P % , P 7 , P 9  are efficient because tat is $ere te isoquants for  ro uction of # an ro uction of + are 4ust tan!ent $it eac oter& No more of one !oo can be ro uce $itout less of te oter one of bein! ro uce &*is is referre to as te :Contract Cure;& Alon! tis cure te (<ate of *ecnical /ubstitution) <*/ #8  = <*/ +8 &If one lots tese oints in #, +, sace tey !ie us te ro uction ossibility cure&<ate of Pro uct *ransformation <P* (of # for +) = > sloe of ro uction ossibilities frontier *otal abor O #    *  o   t  a   l   C  a  )   i   t  a   l P 1 P % P 7 P 9 + 9 + 7 + % + 1 # % # 9 # 7 # 1  O + Quantity of # *e ne!atie alue of te sloe of te tan!ent to te ro uction ossibilities frontier is te rate of ro uct transformation # 7 # % # 1 + 9 + 7 + % + 1 # 9 Q # Q +    Q  u  a  n   t   i   t  y  o   f   + 7
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