General Equilibrium

The price mechanism plays a crucial role in a general equilibrium model by allocating resources efficiently, determining equilibrium quantities, and ensuring that supply and demand are equal in all markets.

The fundamental theorem of welfare economics states that in a perfectly competitive general equilibrium, the allocation of resources is both Pareto efficient and socially optimal, meaning that it is impossible to make one individual better off without making someone else worse off.

The Arrow-Debreu model is a general equilibrium model with a finite number of goods and consumers, where each consumer has a utility function and each producer has a production function.

The Walrasian auctioneer is a hypothetical agent who coordinates the exchange of goods and services in a general equilibrium model by calling out prices and adjusting them until supply and demand are equal in all markets.

The cobweb model is a dynamic general equilibrium model that analyzes the interaction between supply and demand over time, where producers adjust their output based on the current market price and consumers adjust their demand based on the current market price.

Pareto efficiency is a situation where it is impossible to make one individual better off without making someone else worse off, meaning that any reallocation of resources will make at least one individual worse off.

The social optimum is a situation where the allocation of resources is Pareto efficient and maximizes the sum of individual utilities, meaning that it is impossible to make one individual better off without making someone else worse off and that the total utility of society is maximized.

The second welfare theorem states that in a perfectly competitive general equilibrium, any Pareto efficient allocation of resources can be achieved through a lump-sum transfer of income, meaning that it is possible to redistribute income in a way that makes everyone better off without affecting the efficiency of the allocation of resources.

The compensation principle states that any Pareto efficient allocation of resources can be achieved through a lump-sum transfer of income, meaning that it is possible to redistribute income in a way that makes everyone better off without affecting the efficiency of the allocation of resources.

The Edgeworth box is a graphical representation of the Pareto efficient allocations of resources in a two-good, two-consumer economy, where the axes represent the quantities of the two goods consumed by each consumer and the indifference curves represent the preferences of each consumer.

The contract curve is the set of all Pareto efficient allocations of resources in a two-good, two-consumer economy, which is the set of all allocations that lie on the Edgeworth box and are not dominated by any other allocation.

The core is the set of all Pareto efficient allocations of resources that are also individually rational, meaning that no consumer can be made better off by reallocating resources without making someone else worse off.

The impossibility theorem, also known as Arrow's impossibility theorem, states that it is impossible to design a social choice rule that satisfies certain desirable properties, such as Pareto efficiency, individual sovereignty, and non-dictatorship.

The Bergson-Samuelson social welfare function is a social welfare function that is defined as the sum of individual utilities, meaning that the social welfare is maximized when the sum of individual utilities is maximized.