Monday March 24
Chapter 16 – General Equilibrium
• Due tonight on OWL
Partial vs. General Equilibrium Modelling
• Partial Equilibrium: looking at a single market
o What happens to price and quantity in a single market when there is an
exogenous change outside the system?
o eg. What happens to the market for cigarettes when we impose a cigarette
The tax should move the supply curve up by the amount of the tax
• General Equilibrium: the determination of prices and quantities in several
o These prices are determined simultaneously
o eg. Demand in the corn market is: Q = 12-2P + P c s
Supply in the corn market: Q = 4 + P
Demand for soybeans: Q = s-4P + P s c
Supply for soybeans: Q = 4 + P s
There is a negative relationship between the quantity demanded for
corn and the price of corn. As the price of corn goes up by 1 unit,
the quantity of corn goes down by 2 units.
If there is an exogenous change (coming from outside the system)
such as the government mandating that all gasoline contains 10%
corn ethanol (this passed in the U.S., but not Ontario because there
is no environmental benefit as it actually increases carbon
emissions to produce and ship it).
Corn and soybeans are substitutes for one another, so as the price
of corn goes up, we will substitute into soybeans. This will cause
an increase in the quantity demanded for soybeans, and an
increase in the price of soybeans.
Is there a third market being affected?
• If the price of corn and soybeans are going up, the price of
beef, cereal, and many other foods will also go up because
the cost of an input has increased.
• The price of agricultural land will also increase because the
farmer’s demand for land has gone up.
• These reasons also contributed to the reasons why Ontario
did not pass the law regarding corn ethanol in gasoline.
Circular Flow Model • You have to take all of these markets into account
Pareto Efficiency (= economic efficiency)
• There is no other feasible allocation of X and Y (our goods and services) that will
make some consumers better off without making others worse off
• At an inefficient allocation, there is a trade that can make some consumers better
off than they were before
General Equilibrium Outcome
• Pareto efficient as long