FE1

1.

Financial Economics
Lecture2
Roger Geng

2.

Competitive Equilibrium
Demand
Supply

3.

Competitive Equilibrium-Intro
Competitive equilibrium (also called: Walrasian equilibrium) is a
concept of economic equilibrium, introduced by Kenneth Arrow and
Gérard Debreu in 1951, appropriate for the analysis of commodity
markets with flexible prices and many traders, and serving as the
benchmark of efficiency in economic analysis. It relies crucially on the
assumption of a competitive environment where each trader decides
upon a quantity that is so small compared to the total quantity traded
in the market that their individual transactions have no influence on
the prices. Competitive markets are an ideal standard by which other
market structures are evaluated.

4.

Competitive Equilibrium-Definition
Two Elements:
• Price function P
• Allocation of resources C (consumptions)
Three requirements:
• Market clearance
• Individual rationality
• Budget balance

5.

Competitive Equilibrium-Definition’
Two Elements:
• Price function P
• Allocation of resources C (consumptions)
Two requirements:
• Market clearance
• Utility maximization

6.

Competitive Equilibrium-Example

7.

Competitive Equilibrium-Example
Utility functions: