Econ 701 Lecture Notes

Pure Exchange Economics

Two goods and two agents; The existence of the competitive equilibrium

Capitalist Economy

For economy system:

  • Community-based: non-capitalist sector; economy managed by the community; reciprocity

  • Market-based: capitalist sector; market economy with isolate self-interested individual

  • Redistributional: government sector; redistributional resource allocation by the central planner

Capitalist market economy:

G-W-G’

Market Econmomy

  • Competitive mechanism as an incentive scheme. contract theory, informational economics

  • Competitive mechanism as a coordination of resource allocation. General equilibrium theory. Static aspect of competitive mechanism of market.

  • Competitive mechanism as promoting economic progress (Marx’s argument on capitalist promoting civil society; Schumpeter on technical progress). Dynamic aspects of competitive mechanism

No tool or standard to handle the sustainability issue.

Two goods two agents pure exchange economy

Let \(\Omega=(\Omega_{1},\Omega_{2})\geqq(0,0)\) be the social endowment of the two commodities. Let \(x^{i}=(x_{1}^{i},x_{2}^{i})\) represents the agent i’s consumption of commodities, for \(i=1,2\). A resource allocation problem is to specify a profile of consumption \(x=(x^{1},x^{2})\) such that

\begin{equation} x^{1}+x^{2}\leqq\Omega.\nonumber \\ \end{equation}