Week 11

General Equilibrium
(Jehle and Reny, Ch.5)

Serçin “ahin

Yldz Technical University

4 December 2012

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 1 / 26
 Is there one particular state towards which the system will tend?
or are there may such states?
Are these fragile things that can be easily disrupted or are they robust?

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 2 / 26
 Equilibrium in Exchange

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 3 / 26
 Equilibrium in Exchange

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 4 / 26
 Equilibrium in Exchange

Consider now the case of many consumers and many goods.Let

I = {1, ..., I }
index the set of consumers, and suppose there are n goods.
Each consumer i ∈ I has a preference relation, i
and is endowed with a non-negative vector of the n goods,
e = (e , ..., en ).
i i i
1

Altogether, the collection ε = i , ei i∈I denes an exchange

economy.

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 5 / 26
 Equilibrium in Exchange

Let e ≡ e , ..., eI denote the economy's endowment vector, and

1

dene an allocation as a vector x ≡ x , ..., xI , where xi ≡ x i , ..., xni

1


1

denotes consumer i 's bundle according to the allocation.

The set of feasible allocations in this economy is given by

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 6 / 26
 Equilibrium in Exchange

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 7 / 26
 Equilibrium in Exchange

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 8 / 26
 Equilibrium in Exchange

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 9 / 26
 Equilibrium in Competitive Market Systems

In a perfectly competitive market system, all transactions between

individuals are mediated by impersonal markets.
A noteworthy feature of the competitive model is its decentralized
nature.
It is essential that prices are able to clear all markets simultaneously.
The interdependence of markets renders the existence of an
equilibrium price vector a subtle issue.

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 10 / 26
 Equilibrium in Competitive Market Systems Existence of Equilibrium

Again let I = {1, .., I } index the set of consumers and assume that
each is endowed with a non-negative vector ei of n goods.
Further, suppose each consumer's preferences on the consumption set
Rn+ can be represented by a utility function u i satisfying the following
assumption.
Assumption 5.1: Utility is continuous, strongly increasing, and

strictly quasiconcave on Rn+ .

If p ≡ (p , ..., pn )  0 is the vector of market prices, then each
1

consumer solves

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 11 / 26
 Equilibrium in Competitive Market Systems Existence of Equilibrium

The solution xi (p, p.ei ) is the consumer's demanded bundle, which

depends on market prices and the consumer's endowment income.

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 12 / 26
 Equilibrium in Competitive Market Systems Existence of Equilibrium

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 13 / 26
 Equilibrium in Competitive Market Systems Existence of Equilibrium

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 14 / 26
 Equilibrium in Competitive Market Systems Existence of Equilibrium

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 15 / 26
 Equilibrium in Competitive Market Systems Existence of Equilibrium

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 16 / 26
 Equilibrium in Competitive Market Systems Existence of Equilibrium

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 17 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 18 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 19 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 20 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 21 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 22 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 23 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 24 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 25 / 26
 Equilibrium in Competitive Market Systems Eciency

Serçin “ahin (Yldz Technical University)Week 11 General Equilibrium (Jehle and Reny, Ch.5)
4 December 2012 26 / 26