Topic 4: Competitive Equilibrium in a Static Model

Competitive Equilibrium

Now that we understand how consumers and firms in our simple model economy make optimal decisions for themselves, we bring them together and describe the criteria that must be satisfied in a "competitive equilibrium."

Pareto Optimality

How do we determine if one way of allocating the resources in an economy is better (or worse) than another way of allocating those same resources? A common standard for comparing allocations is the notion of Pareto Optimality, which is used to establish whether allocations use resources efficiently.

Fundamental Welfare Theorem

Is an allocation of resources in competitive equilibrium always (or ever?) going to be Pareto optimal? Is a Pareto optimal allocation of resources even achievable in a competitive equilibrium?

Graphical Representation of Competitive Equilibrium

We now know the requirements that must be satisfied in competitive equilibrium. Next, we'll develop a graphical representation of competitive equilibrium, which we can use to understand how the economy responds to various changes.

Competitive Equilibrium Response to Increased Government Spending

A common question in macroeconomics is how the economy should respond to a change in government spending (such as increased spending to pay for a war, or in response to a recession). We'll explore this scenario using the graphical model we developed in the previous video.

Competitive Equilibrium Response to Increased Total Factor Productivity

Businesses and workers tend to get more productive over time as innovation generates technological improvements. How does this impact competitive equilibrium in our simple macroeconomic model? What happens to workers' wages, total output, and other macroeconomic variables?

Distortionary Taxes and Subsidies

Until now, our simple macroeconomic model has assumed that consumers pay fixed lump-sum taxes, regardless of how much they work or consume. How might consumer behaviors change if they instead face taxes (or subsidies) that change with their decisions?