Summary ECS3704 STUDY GUIDE 2022

ECS3704 STUDY GUIDE. In a perfect world - a limited role for government (“order functions”).  In the real world - a more comprehensive role for government. Why? In solving the economic problem the market fails in terms of  efficiency (Ch 2, 3 & 4)  equity (Ch 5)  Allocative efficiency (a normative approach)  measure is Pareto norm - where it is impossible to increase utility/output of one person/sector without reducing that of another,ie, utility (of consumers) is maximised and output (of producers) is maximised  it occurs where three conditions hold  efficiency in consumption (MRSa xy = MRSb xy = Px/Py)  efficiency in production (MRPTxy = MCx/MCy = Px/Py)  simultaneous (market) equilibrium, ie, where MRSa xy = MRSb xy = MRPTxy = Px/Py [perfect competition ensures conditions are met] What should you be able to do?: 1. state 3 conditions and describe … eg. Condition (1): efficiency in consumption is where MRSa xy = MRSb xy implying it is impossible to increase utility of person A without decreasing the utility of B 2. illustrate & explain simultaneous equilibrium… see fig 2.4 SIMULTANEOUS (MARKET) EQUILIBRIUM (fig 2.4)  slope of tangent to PPC (Tt) indicates MRPTxy = MCx/MCy = Px/Py … see eq (2.5)  slope of tangent to indiff curves (Vv) indicates MRSa xy = MRSb xy = Px/Py ….see eq (2.6)  since relative price ratio is = in both equations MRPTxy = MCx/MCy = Px/Py = MRSa xy = MRSb xy… see eq (2.7)  allocative efficiency (points F and F')  requires productive efficiency and consumption efficiency (ie slopes of Vv and Tt =)… point B?... gains from exchange possible until MRPT = MRS  occurs at different distributions of income