Why must a change in one market be traced into others under general equilibrium?
Prices change both endowment wealth and choices, so everyone must optimize and all markets clear together.
Follow the cause and effect
Start from endowments and both consumers’ preference directions.
Find interior points with MRSA=MRSB on the contract curve.
Choose px/py equal to MRS and verify zero aggregate excess demand.
The model you are using
Conditions for this model
Two people and two goods, no production, U_A=x_A y_A,U_B=x_B y_B, and total x=y=10.
The exam trap
Pareto efficient does not mean fair; the contract curve contains many utility distributions.
Connect the reasoning to the graph
What changes
- An Edgeworth box represents both allocations with one point, and the contract curve links tangencies.
What stays fixed
Two people and two goods, no production, U_A=x_A y_A,U_B=x_B y_B, and total x=y=10.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Choose px/py equal to MRS and verify zero aggregate excess demand.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Explain how endowments select a competitive equilibrium from the contract curve.