Chapter 1,Slide 1,Topics to be Discussed,General Equilibrium Analysis Efficiency in Exchange Equity and Efficiency Efficiency in Production,Chapter 1,Slide 2,Topics to be Discussed,The Gains from Free Trade On Overview-The Efficiency of Competitive Markets Why Markets Fail,Chapter 1,Slide 3,General Equilibrium Analysis,Partial equilibrium analysis presumes that activity in one market is independent of other markets.,Chapter 1,Slide 4,General Equilibrium Analysis,General equilibrium analysis determines the prices and quantity in all markets simultaneously and takes the feedback effect into account.,Chapter 1,Slide 5,General Equilibrium Analysis,A feedback effect is a price or quantity adjustment in one market caused by price and quantity adjustments in related markets.,Chapter 1,Slide 6,General Equilibrium Analysis,Two Interdependent Markets-Moving to General Equilibrium Scenario The competitive markets of: Videocassette rentals Movie theater tickets,Two Interdependent Markets: Movie Tickets and Videocassette Rentals,Price,Number of Videos,Price,Number of Movie Tickets,Two Interdependent Markets: Movie Tickets and Videocassette Rentals,Price,Number of Videos,Price,Number of Movie Tickets,$6.35,QM,S*M,QV,DV,$3.50,Chapter 1,Slide 9,Observation Without considering the feedback effect with general equilibrium, the impact of the tax would have been underestimated This is an important consideration for policy makers.,Two Interdependent Markets: Movie Tickets and Videocassette Rentals,Chapter 1,Slide 10,Questions What would be the feedback effect of a tax increase on one of two complementary goods? What are the policy implications of using a partial equilibrium analysis compared to a general equilibrium in this scenario?,Two Interdependent Markets: Movie Tickets and Videocassette Rentals,Chapter 1,Slide 11,The Interdependence of International Markets,Brazil and the United States export soybeans and are, therefore, interdependent. Brazil limited exports in the late 1960s and early 1970s. Eventually the export controls were to be removed, and Brazilian exports were expected to increase.,Chapter 1,Slide 12,Partial Analysis Brazilian domestic soybean price will fall and domestic demand for soybean products would increase.,The Interdependence of International Markets,Chapter 1,Slide 13,General Analysis In the U.S. the price of soybeans and output would increase; U.S. exports would increase and Brazilian exports would fall (even after regulations ended).,The Interdependence of International Markets,Chapter 1,Slide 14,Efficiency in Exchange,Exchange increases efficiency until no one can be made better off without making someone else worse off (Pareto efficiency). The Advantages of Trade Trade between two parties is mutually beneficial.,Chapter 1,Slide 15,Efficiency in Exchange,Assumptions Two consumers (countries) Two goods Both people know each others preferences Exchanging goods involves zero transaction costs James labor and capital Produce two products; food and clothing Many people own and sell inputs for income Income is distributed between food and clothing,Chapter 1,Slide 54,Efficiency in Production,Observations Linkage between supply and demand (income and expenditures) Changes in the price of one input triggers changes in income and demand which establishes a feedback effect. Use general equilibrium analysis with feedback effects,Chapter 1,Slide 55,Efficiency in Production,Production in the Edgeworth Box The Edgeworth box can be used to measure inputs to the production process.,Chapter 1,Slide 56,Efficiency in Production,Production in the Edgeworth Box Each axis measures the quantity of an input Horizontal: Labor, 50 hours Vertical: Capital, 30 hours Origins measure output OF = Food OC = Clothing,40L,30L,Labor in clothing production,Efficiency in Production,50L,0C,0F,30K,Capital in clothing production,20L,10L,20K,10K,10L,20L,30L,40L,50L,Capital in food production,10K,20K,30K,Labor in Food Production,Each point measures inputs to the production A: 35L and 5K-Food B: 15L and 25K-Clothing Each isoquant shows input combinations for a given output Food: 50, 60, consumes 6 lbs. and 2 gals. Without Trade: 3 lbs. and 2 gals.,Chapter 1,Slide 76,The Gains from Trade,Wine (gallons),Cheese (pounds),Who gains and who loses from trade?,Chapter 1,Slide 77,The Effects of Automobile Import Quotas,A Changing Automobile Market Imports (as a percentage of domestic sales) 1965 - 6.1% 1980 - 28.8% In 1981 a voluntary export restraint (VER) was negotiated. In 1980 Japan exported 2.5 million cars to the U.S. In 1981 with the VER exports fell to 1.68 million cars.,Chapter 1,Slide 78,Measuring the Impact of the VER 1)Japanese car prices rose nearly $1,000/car in 1981-1982, and revenue increase by $2 billion. 2)Demand for U.S. cars increasedU.S. profits by $10 billion,The Effects of Automobile Import Quotas,Chapter 1,Slide 79,Measuring the Impact o