General Equilibrium 1 Pure Exchange: An economy with no production.

Starting with their endowments, consumers can exchange goods among one another. Edgeworth box: used to illustrate the case with two consumers and two goods Two Consumers and Two Goods otations: Consumers, denoted by i ! ",# Commodities, denoted by l ! ",# Consumer i$s consumption o% good l is xli Consumer i$s consumption &ector is xi ! 'x"i, x#i( A consumption allocation x ! 'x", x#(, Consumer i$s endowment o% good l is wli Consumer i$s endowment &ector is i ! '"i, #i( Total endowment o% good l in the economy is l ! l" + l# Price &ector p ! 'p", p#( Feasible Allocations: Budget Set: xl" ) xl# l %or l ! ",#

Bi ' p ( = + x i # + : p xi p i *

Offer Curve: The locus o% consumption demanded as prices &ary. ,e%inition: Walrasian 'or competitive( equilibrium %or an Edgeworth box economy is a price &ector p* and allocation x* in the Edgeworth box such that %or i = ", #, xi i xi %or all xi Bi ' p ( ote: only relati&e prices are determined in e-uilibrium ,e%inition: An allocation x in the Edgeworth box is Pareto optimal 'or Pareto efficient( i% there is no other allocation x in the Edgeworth box i xi %or i ! ",# and xi i xi %or some i. with xi