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ECO2003 week one summary
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ECO2003 week one summary notes
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WEEK ONE RECAP - SLIDESIntroduction – concepts
Two key insights to remember:
1. In economic interactions when there are mutual gains possible there must be
conflicts over how these mutual gains will be distributed.
2. Institutions and the exercise of power are critical in how the gains are
distributed
INSTITUTIONS
Institutions are written and unwritten rules that govern
• What people do when they interact in joint project
• The distribution of the economic rents of their joint effort
Closely related to power
• The ability to set the terms of an exchange (e.g. wage)
• Impose penalty
UNIT 5
B. Evaluating outcomes
Pareto Efficiency
Allocation: outcome of an economic interaction. (Describes who does what, and who gets
what)
,An allocation is Pareto efficient if nobody can be better off without making somebody worse
off.
Pareto Efficiency: Caveats
Often more than one Pareto efficient allocation. Pareto criterion does not help us
choose among these allocations.
Pareto efficiency is unrelated to fairness.
Fairness
Evaluate the rules of the game as well as the outcome.
Allocations can be considered unfair for two reasons:
1. Inequality of final outcome (e.g. wealth, well-being)
Substantive judgement of fairness
2. How they came about (e.g. force vs. fair play, equal opportunity, conforming to
social norms)
Procedural judgement of fairness
Rawls’ veil of ignorance: Taking an impartial perspective
, INTRODUCTION TO FARMING MODEL
BUILDING BASIC MODEL
Structure
• Graph and explain the shape of Angela's feasible frontier.
• Graph and explain Angela's indifference curves.
• Explain, in detail, the stable equilibrium in the case where Angela is free to farm the land
as she sees fit.
Angela’s Farm
Assume independent farmer Angela.
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