MICRO NOTES 2/12

Economic Efficiency: State of the world in which it is IMPOSSIBLE to make one consumer better off without making another consumer worse off.

Economic Efficiency is ensured by consumers trading with one another

The system isn't efficient unless both consumers are at points along their indifference curves with EQUAL SLOPES
if they have equal slopes, there's no reason for them to trade anymore
-two consumers can trade for their mutual benefit if, at their original endowment, the slopes of their indifference curves are different
-if their slopes are the same, there's no point in trading

Do equilibrium states deliver economic efficiency?
-sometimes yes, sometimes no

if consumers are in a state of economic efficiency-
-they're offered a chance to trade but dont take it for some reason
-we know at least TWO things about the consumers
-A) at points along the indifference curve of equal slope
-B) they're facing the same prices
if consumers are facing the same prices, they face the same slope of the budget constraint

why is price equilibrium a decent assumption to make?
-arbitrage
-the idea that if a good is offered at different prices in different places, there is the opportunity to make profit by buying low and selling high
-this tends to stabilize prices towards the middle
-arbitrage doesn't work sometimes: when transportation is a factor, for instance

Market Equalizers
-graph ppf vs indifference curve
-if we move along the ppf down and to the right, we can make big amounts of good 2 without sacrificing much 1
-this moves consumers to higher indifference curves (assuming certain slopes on the indifference curve and ppf)