Lectures in Microeconomics-Charles W. Upton Indifference Curves.
Lectures in Microeconomics-Charles W. Upton More Welfare Economics.
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Transcript of Lectures in Microeconomics-Charles W. Upton More Welfare Economics.
Lectures in Microeconomics-Charles W. Upton
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Apples
BananasLabor
CapitalAB
The Production Frontier
MRTSAKL = MRTSB
KL
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Some Basic Assumptions
• A simple economy:Harry and Sally.• There are two factors of production,
capital, K, and labor, L. L = LH + LS
• These two factors of production can be used to produce either apples or bananas.
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Three Basic Questions
1. How many apples and how many bananas should be produced?
2. How should the apples and bananas be allocated between Harry and Sally?
3. How should capital and labor be allocated to the production of apples and bananas?
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What We Have Seen
• Markets get us Pareto Optimality in Distribution.
MRS(Harry) = MRS (Sally)• There is more to the story.
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Pareto Optimality in Production
Apples
BananasLabor
CapitalA
B
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Pareto Optimality in Production
Apples
BananasLabor
CapitalA
B
The Production Frontier
More Welfare Economics
Pareto Optimality in Production
Apples
BananasLabor
CapitalA
B
The Production Frontier
MRTSAKL = MRTSB
KL
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Integration
Bananas
Apples
Production Possibility Frontier
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Integration
Bananas
Apples
Production Possibility Frontier
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Integration
Bananas
Apples
Production Possibility Frontier
Slope = MRT
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Integration
Bananas
Apples
Production Possibility Frontier
Slope = MRT
Harry and Sally’s Contract Curve and Indifference Curves
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Integration
Bananas
Apples
Production Possibility Frontier
Slope = MRT
Harry and Sally’s Contract Curve and Indifference Curves
Slope = MRS
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Integration
Bananas
Apples
The ownership of capital determines where we end up.
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Integration
Bananas
Apples
The ownership of capital determines where we end up.
MRS = MRT
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Integration
Bananas
Apples
The ownership of capital determines where we end up.
MRS = MRT
We are Pareto Optimal
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Integration
Bananas
Apples
The ownership of capital determines where we end up.
MRS = MRT
We are Pareto Optimal
But we can change the initial
endowment
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Summing Up
• This is the basic proof of the efficiency of the free market.
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Summing Up
• This is the basic proof of the efficiency of the free market.
• MRS = MRT. We are Pareto Optimal..
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Summing Up
• This is the basic proof of the efficiency of the free market.
• The primary objection people raise is about the resulting distribution of income.
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Income Distribution
• The primary objection people raise is about the resulting distribution of income.
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Income Distribution
• The primary objection people raise is about the resulting distribution of income.
• How can the market be so good if a very wealthy person can feed his dogs filet minion while others are struggling to live on dog food?
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Income Distribution
• The primary objection people raise is about the resulting distribution of income.
• How can the market be so good if a very wealthy person can feed his dogs filet minion while others are struggling to live on dog food?
All we have shown is that the competitive solution
achieves efficiency.
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Income Distribution
• The primary objection people raise is about the resulting distribution of income.
• How can the market be so good if a very wealthy person can feed his dogs filet minion while others are struggling to live on dog food?
All we have shown is that the competitive solution
achieves efficiency.
We cannot make one person better
off without making another worse off
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Income Distribution
• The primary objection people raise is about the resulting distribution of income.
• How can the market be so good if a very wealthy person can feed his dogs filet minion while others are struggling to live on dog food?
All we have shown is that the competitive solution
achieves efficiency.
We cannot make one person better
off without making another worse off
If we take filet from the wealthy,
depriving their dogs, to give to the poor, we are making one
person better off and another worse off
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Summing Up
• The final distribution of apples and bananas between Harry and Sally is ultimately determined by who owns the capital and labor.
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Summing Up
• The final distribution of apples and bananas between Harry and Sally is ultimately determined by who owns the capital and labor.– If you think Harry is getting too much at the
expense of Sally, economists argue you ought to redistribute income by redistributing the ownership of capital from Harry to Sally.
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Summing Up
• The final distribution of apples and bananas between Harry and Sally is ultimately determined by who owns the capital and labor.
• Efforts to interfere with markets lead to inefficiency. We end up inside the production possibility curve.
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Summing Up
• The final distribution of apples and bananas between Harry and Sally is ultimately determined by who owns the capital and labor.
• Efforts to interfere with markets lead to inefficiency. We end up inside the production possibility curve. – Most distribution schemes involve income taxes
– If I must pay a tax of (say) 50% of my salary, then my incentives to work are reduced.
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End
©2006 Charles W. Upton