General equilibrium ppt

General equilibrium analysis involve the states, where all the markets and the decision making units in the economy are in a simultaneous equilibrium.

1. General equilibrium SUBMITTED TO :- DR.SUKHMANI VIRK SUBMITTED BY:- DEEPINDER KAUR

2. INTRODUCTION General equilibrium analysis involve the states, where all the markets and the decision making units in the economy are in a simultaneous equilibrium. It studies the simultaneous equilibrium in a group of inter related markets emphasizing the inter dependence between the different economics units in the economy.

3. assumptions There are two factors of production labour ,L capital K are given exogenously. There are two goods X and Y with the isoquants depicting the constant returns to scale and a diminishing marginal rate of substitution. There are two consumers A and B with there indifferent curves as convex to the origin depicting a diminishing marginal rate of substitution. Each firm aims at maximizing profits,given the techniques of production. Each consumer aims at maximizing its utility, given his income. The consumers own the factors, labour and capital and spend the whole income that they receive as owners of the factors.there is full employment of the factors. There exists perfect competition in both the factor and the goods market.

4. General equilibrium of production At this point equilibrium of the firm is where it is maximizing its profits i.e. price of goods and factors to remain same. In case of one good the equilibrium exists where the slop of isoquant is equal to the slop of isocost line. MRTS LK =P L P K In case of two goods general equilibrium of production exists at the point where (MRTS LK ) x =MRTS LK ) y

5. Unit of labour on x-axis and units of capital on y-axis Each point shows specific combination of labour and capital. The point of tangencies of the isoquants of goods x and y is the contract curve of production. Point R represents insufficient allocation of inputs.

6. Production possibility frontier Production possibilty frontier depicts the different combinations of two goods x and y that an economy can produce by utilizing all of its resources of capital and labour given the techniquies of production. Each point on the production possibility frontier is an efficient allocation of the inputs. Concave to the origin. Slop of the production possibility frontier is called the marginal rate of transformation. It measures the amount by which an economy must decrease its output of good y and increase a sufficient amount of the factors , labour and capital, to increase the output of good x by one more unit.

7. Concave to the origin Point A represents X 1 units of good x and Y 3 units of y. Point C represents X 3 units of x and Y 1 units of y.

8. General equilibrium of exchange(consumption ) A consumer achieves equilibrium when he maximizes his utility. A consumes is in equilibrium when he is able to reach the highest indifference curve or where slope of indifference curve = slope of budget line. in case of one consumer: MRS xy =P X P Y In case of two goods: (MRS XY ) A =(MRS XY ) B

9. Point O A marks the origin for consumer A while point O B Marks the origin for consumer B. Each point shows specific combination of goods X and Y. The loctus of point of tangencies of the IC for consumer A and B is called contract curve of consumption. Point D represents an inefficient allocation of goods because with the reallocation it is possible for consumers to achieve points like L and N which represents a greater utility to atleast one consumer. Good Y Good X

10. GENERAL EQUILIBRIUM IN PRODUCTION AND EXCHANGE For general equilibrium of production and exchange to exists it is necessary that the slope of production possibility frontier equal to the slope of indifference curve MRT XY = MRS XY

11. A general equilibrium in production exchange will exists at point M where slope of the indifference curve = slope of the production possibility frontier OR slope of the tangent to the indifference curve A 2 and B 2 =slope of the tangent to the production possibility frontier OR (MRS xy ) A =(MRS xy ) B = MRT xy Slope of production possibility frontier

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