Summary
Summary Microeconomics exam revision notes
- Institution
- Durham University (DUT)
Exam revision notes for second-year microeconomics module
[Show more]
Seller
Follow
Content preview
REVISIONTerm 2
General equilibrium – exchange economy
- General equilibrium (= supply equal to demand in all markets simultaneously)
analysis considering all markets simultaneously & taking feedback effect (=
price/quantity adjustment in one market caused by price & quantity adjustments
in related markets) into account
- Pure exchange economy
Two consumers: A , B each seeking individual utility maximization
Two goods: good 1 & good 2
Available quantities: 1, 2
Endowments:
A 's income if A selling all endowments of goods 1 & 2 in market –
monetary exchange received for endowment (= wealth):
B's income if B selling all endowments of goods 1 & 2 in market –
monetary exchange received for endowment (wealth):
- Edgeworth box showing all possible allocations of available quantities of goods
1 & 2 between two consumers
- All allocations of goods 1 & 2 all points in Edgeworth box including borders
- Allocation of goods 1 & 2 only plausible if:
- Before-trade endowment allocation
,- Preferences of consumers sloping downwards indifference curves
o Note: direction of improvement of consumer A’s welfare (see red arrow) ;
direction of improvement of consumer B’s welfare (see green arrow)
- Pareto-improving allocation = allocation of endowment improving welfare of at
least one consumer without reducing welfare of other consumer(s)
- Consumers able refusing trade if in best interest only possible outcomes from
exchange = Pareto-improving allocations
- Point of Pareto optimal/efficient allocation when indifference curves of
consumers A & B tangential impossibility of improving at least one
consumer’s welfare without making other consumer(s) worse off
, - Contract curve (black line) = set of all Pareto optimal/efficient allocations = set
of points where traders' indifference curves tangential
Finding slope of contract curve & point of Pareto efficiency – solving three
equations
A B
MRS = MRS
x 1A + x B1 =ω1A +ω1B
x 2A + x B2 =ω2A +ω2B
- Trade in perfectly competitive market consumers guided by own preferences
& constraints of market
Given endowments & prices p ₁ and p ₂ consumers A & B solving own utility
maximisation problem subject to respective budget constraints (write “A solves”
& “B solves”)
Equilibrium: total demand = total resources available
Supply fixed
Consumer’s budget constraint: consumer’s total expenditure = consumer’s
endowment’s total monetary value
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller emmalmartinelli. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £10.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
78140 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now