Comprehensive Study Guide: General
Equilibrium
Based on Intermediate Microeconomics by Hal R. Varian
Contents
1 Introduction to General Equilibrium 3
2 Pure Exchange: The Edgeworth Box 3
2.1 Constructing the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Allocations and Endowments . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Preferences in the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3 Pareto Efficiency 4
3.1 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 The Condition for Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 The Contract Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4 Market Equilibrium (Walrasian Equilibrium) 5
4.1 Budget Constraints in General Equilibrium . . . . . . . . . . . . . . . . . 5
4.2 Gross vs. Net Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.3 Definition of Competitive Equilibrium . . . . . . . . . . . . . . . . . . . . 6
5 Walras’ Law 6
5.1 Relative Prices and The Numeraire . . . . . . . . . . . . . . . . . . . . . 6
6 The Welfare Theorems 6
6.1 First Fundamental Theorem of Welfare Economics . . . . . . . . . . . . . 7
6.2 Second Fundamental Theorem of Welfare Economics . . . . . . . . . . . 7
7 Production in General Equilibrium 7
7.1 Production Possibilities Frontier (PPF) . . . . . . . . . . . . . . . . . . . 7
7.2 Marginal Rate of Transformation (MRT) . . . . . . . . . . . . . . . . . . 7
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, Intermediate Microeconomics Study Guide: General Equilibrium
7.3 Pareto Efficiency with Production . . . . . . . . . . . . . . . . . . . . . . 8
7.4 Comparative Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
8 Conclusion 8
2
Equilibrium
Based on Intermediate Microeconomics by Hal R. Varian
Contents
1 Introduction to General Equilibrium 3
2 Pure Exchange: The Edgeworth Box 3
2.1 Constructing the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Allocations and Endowments . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Preferences in the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3 Pareto Efficiency 4
3.1 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 The Condition for Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 The Contract Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4 Market Equilibrium (Walrasian Equilibrium) 5
4.1 Budget Constraints in General Equilibrium . . . . . . . . . . . . . . . . . 5
4.2 Gross vs. Net Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.3 Definition of Competitive Equilibrium . . . . . . . . . . . . . . . . . . . . 6
5 Walras’ Law 6
5.1 Relative Prices and The Numeraire . . . . . . . . . . . . . . . . . . . . . 6
6 The Welfare Theorems 6
6.1 First Fundamental Theorem of Welfare Economics . . . . . . . . . . . . . 7
6.2 Second Fundamental Theorem of Welfare Economics . . . . . . . . . . . 7
7 Production in General Equilibrium 7
7.1 Production Possibilities Frontier (PPF) . . . . . . . . . . . . . . . . . . . 7
7.2 Marginal Rate of Transformation (MRT) . . . . . . . . . . . . . . . . . . 7
1
, Intermediate Microeconomics Study Guide: General Equilibrium
7.3 Pareto Efficiency with Production . . . . . . . . . . . . . . . . . . . . . . 8
7.4 Comparative Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
8 Conclusion 8
2
