CH 06

MICROECONOMICS: Theory & Applications
Chapter 6: Exchange, Efficiency, and Prices

By
Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 11th Edition, Copyright 2012 PowerPoint prepared by Della L. Sue, Marist College
Learning Objectives
Understand why voluntary exchange is mutually beneficial. Define what economists mean by efficiency in exchange and delineate the benefits associated with the promotion of such efficiency. Show how competitive markets promote efficient distribution of goods between consumers. Explore the extent to which price and nonprice mechanisms for rationing goods across consumers serve to promote efficiency.
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Economic Efficiency
With regard to exchange, economic efficiency represents a distribution of goods across consumers in which no one consumer can be made better off without hurting another consumer.
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Two-Person Exchange
People engage in exchanges (or trades) because they expect to benefit. Voluntary exchange is mutually beneficial. Edgeworth exchange box: a diagram for examining the allocation of fixed total quantities of two goods between two consumers.
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Table 6.1
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Figure 6.1 - The Edgeworth Exchange Box Diagram
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Figure 6.2 Gains from Trade
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Efficiency in the Distribution of Goods
Pareto optimality another term for economic efficiency: an efficient distribution of fixed total quantities of goods such that it is not possible, through any change in the distribution, to benefit one person without making some other person worse off. Contract curve in an Edgeworth exchange box, a line drawn through all the efficient distributions Inefficiency an allocation of goods in which it is possible, through a change in the distribution, to benefit one party without harming the other Equity the concept of fairness
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Figure 6.3 - Efficient Distributions and the Contract Curve
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Competitive Equilibrium and Efficient Distribution

Price taker firms or consumers who cannot affect the prevailing price through their respective production and consumption decisions Adam Smiths invisible hand: each trader, concerned only with furthering his or her own interest, is led to exchange to a socially efficient result Competitive market: all potential gains are realized from voluntary exchange
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Figure 6.4 - Competitive Exchange
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Competitive Equilibrium and Efficient Allocation
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Figure 6.5 - A Market-Determined Distribution is Efficient
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Price and Nonprice Rationing and Efficiency
Market: prices serve as rationing function demand curve treatment of rationing problems provides an alternative to the use of the Edgeworth box approach
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Figure 6.6 Gasoline Rationing
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Some of the Mathematics behind Efficiency in Exchange
Efficient distribution (interpretations)
One that makes one consumer as well off as possible for a given level of well-being for the other consumer One that maximizes the utility of one consumer subject to the constraint that the utility of the other is held fixed at some level
Consumers indifference curves in the Edgeworth diagram are tangent The consumers MRSs are equal (continued)
Efficient distribution is attained when:
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Some of the Mathematics behind Efficiency in Exchange (continued)
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Some of the Mathematics behind Efficiency in Exchange
(continued)
Copyright 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.

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MICROECONOMICS: Theory & Applications

Chapter 6: Exchange, Efficiency, and Prices

John Wiley & Sons, Inc.

John Wiley & Sons, Inc.

John Wiley & Sons, Inc.

John Wiley & Sons, Inc.

Figure 6.1 - The Edgeworth Exchange Box Diagram

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Figure 6.2 Gains from Trade

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Efficiency in the Distribution of Goods

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Figure 6.3 - Efficient Distributions and the Contract Curve

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Competitive Equilibrium and Efficient Distribution

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Figure 6.4 - Competitive Exchange

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Competitive Equilibrium and Efficient Allocation

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Figure 6.5 - A Market-Determined Distribution is Efficient

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Price and Nonprice Rationing and Efficiency

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Figure 6.6 Gasoline Rationing

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Some of the Mathematics behind Efficiency in Exchange

Efficient distribution (interpretations)

Efficient distribution is attained when:

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Some of the Mathematics behind Efficiency in Exchange (continued)

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Some of the Mathematics behind Efficiency in Exchange

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