ECN 600 Chapter Notes - Chapter 5: Exogeny, Budget Constraint, Competitive Equilibrium

• School: Ryerson University
• Department: Economics
• Course: ECN 600
• Professor: Leo Michelis

Document Summary

Government: the behaviour of the government is quite simple in our model. Competitive equilibrium: by consistency we mean that, given market prices, demand is equal to supply in each market in the economy. That is the representative consumer optimizes given his or her budget constraint determined by wage, taxes, and profits: the representative firm optimizes given total factor productivity, its capital stock, and the market real wage. + y wnd g. in equilibrium, labor supply is equal to labour demand. After: pareto optimality a competitive equilibrium is pareto optimal if there is no substitution and elimination, this gives us the identity equation. Sources of social inefficiencies: what could cause a competitive equilibrium to fail to be pareto optimal, first, a competitive equilibrium may not be pareto optimal because of externalities. The reason is that in studying most macroeconomic issues, an economic model with inefficiencies behaves much like an economic model without inefficiencies.