Instructor Name: Muhammad Yasar

GENERAL EQUILIBRIUM
LECTURE # 4
MSC ECONOMICS (EVE)
3RD SEMESTER

Prepared by Muhammad Yasar

 Source: Chapter # 22 , Modern Microeconomics by A.
koutsoyiannis
PRODUCT MIX
 MRPTX,Y = (MRSX,Y)A = (MRSX,Y)B
 We end up there in the last lecture that there will

Prepared by Muhammad Yasar

be a general equilibrium among two consumers
and producer simultaneously.
 We just have a glimpse of working there

 We are going to check this condition in detail in

this lecture.
EDGEWORTH BOX FOR PRODUCTION

Prepared by Muhammad Yasar

EXPLANATION
 The general equilibrium of production occurs at a point
where the MRTS for all the firms is same.
 F,G and H are points representing the Pareto-efficient
allocation of resources.

Prepared by Muhammad Yasar

 The production equilibrium is not unique.

 So, in a quest we assume that there is a perfect

competition, which is already understood in Pareto
Optimality.
PRODUCTION POSSIBILITY FRONTIER

Prepared by Muhammad Yasar

O
EXPLANATION
 We use here a PPF to represent the Pareto-efficient
points.
 These points f,g and h are the Images of F,G and H in
the Edgeworth Box diagram.

Prepared by Muhammad Yasar

 We are already familiar with the concave curve
property.
 If we move down the curve MRPT will increase and if
we go up to the curve it will decrease.
 So, at h the we suppose MRPT = 2

 At f the MRPT = 1
EQUILIBRIUM OF CONSUMPTION

Prepared by Muhammad Yasar

EXPLANATION

 We have it in the diagram as the point T for

consideration.
 At point T (X,Y) maximum production is there which is

Prepared by Muhammad Yasar

possibly available for consumers.
 Now we have separate the Consumer’s Edgeworth Box
from the diagram.
 It also shows the maximum X1 and Y1 available.

 So, point T which also Pareto-efficient is same as the

point “t” in Edgeworth box diagram.
 Both have same slopes
EXPLANATION
 There are two Pareto-efficient points available on the
contract curve for both consumers.
 On all these points MRS is same for consumer A and
B.

Prepared by Muhammad Yasar

 We need only one point that give us the unique general
equilibrium.
 So, we will consider only the point “t” which has the
condition of product mix.
 On this point we have assumed that
 MRPTX,Y = (MRSX,Y)A = (MRSX,Y)B = PX/PY
Prepared by Muhammad Yasar
THANK YOU