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Advanced microeconomics
a- General equilibrium and Welfare ;
1- Microeconomic Theory , J.M. Henderson , R.E. Quandt
CH 9 - Multi-market Equilibrium CH 10 – Topics in Multi-market equilibrium CH 11 - Welfare Economics
2 - Microeconomic Theory, P.R.G. Layard and A.A. Walters;
CH 1 - Welfare economics CH 2 - General equilibrium CH 3 - Application to Public Finance CH 4 - Application to International Trade
Advanced microeconomics
3- Microeconomic Theory, A. Mas-Collel , M. D. Winston , J. R. Green. CH 15 - General equilibrium theory Ch 16 - Equilibrium and its basic welfare properties CH 17 - Positive Theory of Equilibrium CH 18 - Some foundations for competitive equilibrium CH 20 - Equilibrium and Time CH 21 - Social Choice Theory CH 22 - Elements of Welfare economics
4- A Course In Microeconomics Theory. D. M. Kreps. CH 5 - Social choice and Efficiency CH 6 - Pure Exchange and General Equilibrium.
Advanced microeconomics
d- Original selected articles in microeconomics ,
1- Joan Robinson , The Polar Case of Competition and monopoly. 2- R. Coase The Problem of Social Cost 3- Demesetez, Towards a Theory of Property Right. 4- Arrow , Difficulty in the concept of social welfare function. 5- Yew-Kawng , some fundamental issues in social welfare. 6- Peter Hammond , Welfare Economics.
Advanced microeconomics
7 - Frutz , Machlup , Theories of firm ; marginalist , behavioral ,managerial, 8- Robins , Denis , Muller , The corporation , competition and invisible hand. 9- F. M. Bator , The Anatomy of Market Failture. 10 – Arrow , The organization of Economic Activity 11 – W. Vickery , Some implication of the Marginal Cost Pricing. 12- Arrow, The Potential and Limits of Market in Resource Allocation 13- R. McKean , The nature of Cost Benefit Analysis.
Society's Economic Problem
Two important issues :
1- How should factors be allocated among products? This will determine the quantity of each product , and the techniques which they are produced with.
2-How should the products be distributed among different citizens.
Conclusions could be drawn from a simple model ;
Two persons ; A & B
Two homogenous devisable factors ; L & K
Two homogenous divisible commodities X & Y
Society's Economic Problem
Max W=w(uA ,^ uB) need not to be defined exactly
S.T. uA^ = uA(xA,yA) (1) taste limits the happiness
uB^ = uB(xB,yB) (2) taste limits the happiness x=x(Kx ,^ Lx^ ) (3) technology limits the production y=y(Ky^ , Ly^ ) (4) technology limits the production X= xA^ + xB^ (5) Y = yA^ + yB^ (6) K = Kx+ Ky^ (7) L = Lx^ + Ly^ (8)
Eight constraints and eight unknowns, xA,xB,yA,yB,Kx,Ky,Lx,Ly
Conditions for efficiency
Efficient consumption ; Max UA( xA^ , YA) S.T. UB(xB^ , YB) = u^0 xA^ + xB^ = x yA^ + yB^ = y L = UA( xA^ , YA) +λ[ u^0 - u( x - xA^ , y – yA^ ) ]
LxA= UxA^ + λUxB^ = 0 LyA= Uy A^ + λUy B^ = 0 MRSx,yA^ = MRS (^) x,y B
Both A and B place the same relative value on x and y
Conditions for efficiency
A N M
OA
OB
yA (^) yB
xB
xA
MN : locus of efficient points on contract curve AMN ; efficiency area َ َ
At point A , MRSxyA^ > MRSxyB^. X has more relative value to A and y has more relative value to B. A will give up Y for x and B will give up x for y till MRSxyA^ = MRSxyB^. Efficient consumption requires all individuals place the same relative value on all products
N M
O
O
UA^0
UB^0
UB^1 UA^1
Efficient production
Allocation of given factors among factors of production in such a way that ; for given production level of commodity Y , the output of commodity X be the maximum possible.
Max X=X(Kx , Lx)
S.T. Y^0 =Y(Ky,Ly)
Lx+Ly=L Kx+Ky=K
P.O.→ ( XL / XK ) = RTSLK x^ = RTSLK y^ =( YL / YK )
Labor and Capital are engaged in producing those goods in which they have comparative advantage
Efficient production
K
Ox L
Qy
p
Q
R
x^0
x^1
y^0
y^1
At point p ; RTSLKx^ > RTSLKy
Labor has more productivity in producing x than y , so it has comparative advantage in producing x. more L should be allocated for producing x. We R & Q are efficient points , since RTS for X& Y are the same .they belong to the locus should move from p to Q of all efficient points on the production possibility frontier
Product mix efficiency
Product mix efficiency requires that the subjective value of x in terms of y (MRSxy) be equal to marginal opportunity cost of x in terms y (MRTxy). Y
OA^ X
OB
PPF
MRSxyA^ = MRSxyB^ = MRTxy
uA^0
uB^0
Consumer needs = production ability
Production is efficient Consumption is efficient
X^0
Y^0
Social justice &social optimum
uA
Y
X
OB
OA
x^0
y 0
Y^0
x^0
uB^0
UA^0
UB
UA
UPF(x^0 ,y^0 ) UPF(x^1 ,y^1 )
UB^0 W=W(uA,uB) = social welfare function
UA^0
O
y^0 x^0
K
Ox
Oy
PPF
yA xA
L
Kx Lx
K=Kx +Ky =KA+KB L=Lx + Ly =LA + LB
Social justice & Social optimum
Once point O (bliss point) is chosen, three basic question can be answered when XA, XB, YA,YB are defined , FOR WHOME when Lx, Ly, Kx , Ky are defined , WHAT & HOW
In judging about the point of bliss we have not taken into account the question of equality. In other words we have considered the question of efficiency in isolation from equality. Later on we will refer to this point as dichotomy between production (allocation of inputs) and distribution (equity).
freely functioning economy , market failure, alternative economic systems
What form of organization will bring the economy near to the optimum? If it had all the information , a computer could in principle solve the problem we have passed.
How would a freely functioning economy perform? Remarkably well if we make four sweeping assumption of perfect competition. The key one is that in every perfectly competitive market there are many buyers and sellers and under perfect competition all agents behave as price takers
How a perfect competition economy can satisfy the three conditions for efficiency;
1- efficient consumption;
Max ui=u(xi,yi)
S.T. Pxxi^ + pyyi^ = Mi^ i= individual i = 1,2,…,n
