Prepared by Dr. Della Lee Sue, Marist College
MICROECONOMICS: Theory & Applications
Chapter 19: General Equilibrium Analysis and
Economic Efficiency
By Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
12th Edition, Copyright 2015
Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.
Learning Objectives
Delineate the difference between partial and general
equilibrium analysis.
Explain the concept of economic efficiency.
Outline the three conditions necessary for the attainment of
economic efficiency.
Examine efficiency in production and what this implies
about input usage across different industries.
(continued)
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Learning Objectives (continued)
Show how efficiency in output is related to the production
possibility frontier.
Demonstrate how perfect competition satisfies all three
conditions for economic efficiency.
Spell out the reasons why economic efficiency may not be
achieved.
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Delineate the difference between partial and general equilibrium analysis.
19.1 PARTIAL AND GENERAL
EQUILIBRIUM ANALYSIS COMPARED
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Partial and General Equilibrium
Analysis Compared
General equilibrium analysis – the study of how
equilibrium is determined in all markets simultaneously
Partial equilibrium analysis – the study of the
determination of an equilibrium price and quantity in a
given product or input market viewed as selfcontained and
independent of other markets
assumes that some things that conceivably could, but do
not, change (“other things equal”)
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The Mutual Interdependence of
Markets Illustrated
Spillover effect – a change in equilibrium in one market
that affect other markets
Feedback effect – a change in equilibrium in a market that
is caused by events in other markets that, in turn, are the
result of an initial change in equilibrium in the market
under consideration
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Figure 19.1 Interdependence Between
Markets: Butter and Margarine
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When Should General Equilibrium
Analysis Be Used?
Guideline:
Partial analysis is usually accurate in cases involving a change in
conditions primarily affecting one market among many, with
repercussions on other markets dissipated throughout the economy
General equilibrium analysis tends to be more appropriate when a
change in conditions affects many, or all, markets are the same time
and to the same degree
Pareto optimal
the condition in which it is not possible, through any feasible
change in resource allocation, to benefit one person without making
some other person or persons worse off
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Explain the concept of economic efficiency.
19.2 ECONOMIC EFFICIENCY
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Economic Efficiency
Efficient – Pareto optimal; an allocation of resources when
it is not possible, through any feasible change in resource
allocation, to benefit one person without making any other
person worse off
Inefficient – the condition in which it is possible, through
some feasible reallocation of resources, to benefit at least
one person without making any other person worse off
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Figure 19.2 – The Welfare Frontier
A curve that separates welfare
levels that are attainable from
those that cannot be reached
given the available resources
Every point lying on
the curve satisfies the
definition of economic
efficiency
Every point lying inside
the curve represents an
inefficient allocation of
resources
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Efficiency as a Goal for Economic
Performance
The notions of efficient and inefficient resource allocations
emphasize the factors that affect the level and distribution
of wellbeing.
BUT, given the premise that each person is the best judge of
their own welfare,
we cannot conclude that any efficient position is better
than any inefficient position.
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Outline the three conditions necessary for the attainment of economic
efficiency.
19.3 CONDITIONS FOR ECONOMIC
EFFICIENCY
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Conditions for Economic Efficiency
Any economy must solve 3 fundamental economic
problems:
how much of each good to produce
how much of each input to use in the production of each
good
how to distribute goods among consumers
Condition for efficiency in the distribution of goods:
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Examine efficiency in production and what this implies about input usage
across different industries.
19.4 EFFICIENCY IN PRODUCTION
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Figure 19.3 – Edgeworth Production
Box
…is a diagram that identifies all the ways two inputs such as
labor and land can be allocated between industries in a
simplified economy
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The Production Contract Curve and
Efficiency in Production
Efficient resource allocations in input markets lies on the
contract curve which connects points of tangency between
isoquants.
Where the equilibrium lies on the contract curve depends on
the input prices.
A general equilibrium in competitive input markets will
occur at the point in which the slopes of the isoquants are
equal to one another, as well as the input price ratio.
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Figure 19.4 – General Equilibrium in
Input Markets
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General Equilibrium in Competitive
Input Markets
The condition for cost minimization:
The slopes of the two input isoquants must equal one
another since both are equal to the same input price ratio.
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Show how efficiency in output is related to the production possibility
frontier.
19.5 THE PRODUCTION POSSIBILITY
FRONTIER AND EFFICIENCY IN
OUTPUT
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The Production Possibility Frontier and
Efficiency in Output
The PPF shows the alternative combinations of two goods
that can be produced with fixed supplies of inputs; it can be
derived from the contract curve by plotting various possible
output combinations directly
Marginal rate of transformation (MRT) – the rate at
which one product can be “transformed” into another
At any point on the frontier, the slope, or MRT, equals
MCc/MCF
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Figure 19.5 The Production Possibility
Frontier Revisited
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Efficiency in Output
Efficiency in output is attained when the rate at which
consumers are willing to exchange one good for another
(MRS) equals the rate at which one good can be
transformed into another (MRT):
It is always possible to change the output mix and leave
consumers better off whenever their common marginal rates
of substitution are not equal to the marginal rate of
transformation
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Figure 19.6 Efficiency in Output
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Figure 19.7 – The PPF and the Gains
from International Trade
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