MICROECONOMICS 2:
WELFARE
ECONOMICS
SUMMARY
@ECOsummaries
→ 20% discount
1
,Microeconomics 2 summary
Lecture week 1
Good market outcome = maximizes welfare. Achieved by leaving the market alone. Could lead to
inefficient or unfair outcomes
Efficient market outcome: - all opportunities for trading are exploited
- goods end up in the hands of those who value them the most
- it is not possible to make one better off without making another worse off
Pareto optimal-outcome: not possible to make one better off without making another worse off
1st welfare theorem: free exchange makes everyone best off → Edgeworth box
Pareto improvement: at least one is better off without any other being made worse off
Pareto efficient allocation: when the MRS’S are equal. Their value of bread i.c.t. water is the same
Contract curve: all efficient allocations
Utility possibilities curve:
2
, Production decisions: production can vary
combination of all points that have
production efficiency
Exchange efficiency: all trades that lead to higher utility are exploited
MRSa = MRSb
Production efficiency: all changes in allocation of production that lead to more production are
exploited
MRTSlabor = MRTSland
product mix efficiency: all changes in the mix of products that lead to higher utility are exploited
MRT = Pa/Pb
Competitive economies satisfy these 3 efficiencies
Fundamental theorems of welfare economics:
- every competitive economy is Pareto efficient
- every Pareto efficient resource allocation can be attained through a competitive market
Knowledge of opportunities is important for drive towards efficiency. If the knowledge is dispersed
among many people, prices can act to coordinate the separate actions of different people.
Learn Hayek’s summary! Last slide of slides week 1
3
WELFARE
ECONOMICS
SUMMARY
@ECOsummaries
→ 20% discount
1
,Microeconomics 2 summary
Lecture week 1
Good market outcome = maximizes welfare. Achieved by leaving the market alone. Could lead to
inefficient or unfair outcomes
Efficient market outcome: - all opportunities for trading are exploited
- goods end up in the hands of those who value them the most
- it is not possible to make one better off without making another worse off
Pareto optimal-outcome: not possible to make one better off without making another worse off
1st welfare theorem: free exchange makes everyone best off → Edgeworth box
Pareto improvement: at least one is better off without any other being made worse off
Pareto efficient allocation: when the MRS’S are equal. Their value of bread i.c.t. water is the same
Contract curve: all efficient allocations
Utility possibilities curve:
2
, Production decisions: production can vary
combination of all points that have
production efficiency
Exchange efficiency: all trades that lead to higher utility are exploited
MRSa = MRSb
Production efficiency: all changes in allocation of production that lead to more production are
exploited
MRTSlabor = MRTSland
product mix efficiency: all changes in the mix of products that lead to higher utility are exploited
MRT = Pa/Pb
Competitive economies satisfy these 3 efficiencies
Fundamental theorems of welfare economics:
- every competitive economy is Pareto efficient
- every Pareto efficient resource allocation can be attained through a competitive market
Knowledge of opportunities is important for drive towards efficiency. If the knowledge is dispersed
among many people, prices can act to coordinate the separate actions of different people.
Learn Hayek’s summary! Last slide of slides week 1
3
