Useful Resources - Description of Subsequent Posts

Below are a bunch of short screen movies about General Equilibrium in the Edgeworth Box. These were inspired from reading the recent book, How Markets Fail, by John Cassidy. The videos are based on an Excel workbook that has simulations students can play with to help understand the basic concepts. After the initial video, which introduces the content and shows how the students might use it, the subsequent videos pertain to a particular worksheet. I hope the matching of video to worksheet is transparent.

I have been trying my hand at making accessible content. So there are transcripts for each video. YouTube has a tool that converts the transcripts to captions. That's what I used. The timings aren't perfect. But they are pretty good.

To make the transcripts I ripped the audio portion of the videos into a separate MP3 file. Then I ran that audio through Dragon Naturally Speaking. That gave a preliminary transcript file that I subsequently cleaned up. Again, it isn't perfect, but it is pretty good.

It occurred to me that students on a subsequent viewing might like to have the audio only and the spreadsheet in front of them. So I've got an embedded audio file below each video, in case the students would rather use that. Also, the audio files can be downloaded.

Getting Started with the Spreadsheet

The video below gives an introduction and orientation to what is in these spreadsheets. Students are encouraged to play with the spreadsheet on their own after watching the video to gain familiarity with the Edgeworth Box environment. Push the buttons and see what happens to the graphs. That's what they are for.

Below is a voice only version for those who want to listen while playing with the spreadsheet.

Barter

The Edgeworth Box is a graphical description of what is called an Exchange Economy. In the simplest setup, there are two goods and two consumers. Each has an initial allocation. They can trade with the other. The key economic idea is that people trade to improve their lot, which means trade must make each consumer better off. The video examines the implications of this.

This is the audio only in case the student prefers to play with the spreadsheet while listening.

Consumer A's Offer Curve

I've tried to keep the videos brief, so many of the implicit assumptions are left unsaid. An engaged student might ask, "If this is an exchange economy with barter, why are there market prices?" That's a good question. The answer is to tell a story, but not give a model of a replication economy where there are many consumers who are just like Consumer A and likewise many consumers just like Consumer B. Indeed there are some many "clones" that each is negligible relative to the total. This is the situations that underlies the model of perfect competition, so it is natural to ask in this setting how Consumer A (and by inference also how Consumer B) would act in the presence of market prices.

This is the audio only in case the student prefers to play with the spreadsheet while listening.

Inspired by Cassidy's Book - Determining Competitive Equilibrium

Note that the name of the video doesn't make direct reference to the spreadsheet, which is called Determining Competitive Equilibrium. This is the Edgeworth Box analog of finding the price that equates supply and demand. Note that to keep the graph readable the indifference curves of consumers A and B are not depicted. Only the offer curves show up in the graphs.

This is the audio only in case the student prefers to play with the spreadsheet while listening.

Existence and Uniqueness of Competitive Equilibrium

The interested student should ask when do the conditions that make these results work fail to attain. That is, when is the offer curve discontinuous? That would be a departure here, but might help the students to understand why indifference curves are convex and what would happen if "they curved the other way." Also, for the sophisticated in the audience it might be mentioned that the argument makes sense for the two-goods cases only and that with more goods a different sort of math result is needed (fixed point theorems) to get the outcome.

This is the audio only in case the student prefers to play with the spreadsheet while listening.

Pareto Improvement

This treatment of ranking social allocations is functional based on the notion of gains from trade. When there are gains from trade, what does that look like in the Edgeworth Box? What allocations make both consumer A and consumer B better off? So the role of the status quo as determined by the initial allocation is implicit. There is no goal to determine the entire contract curve. This is just to get the notion of Pareto Improvement in place and to get the students to understand what an allocation looks like when no further Pareto Improvement is possible.

This is the audio only in case the student prefers to play with the spreadsheet while listening.

First and Second Welfare Theorems

It probably won't occur to students without mention that the First Welfare Theorem is viewed by many economists as the formalization of Smith's Invisible Hand. (Though this critique by Mark Blaug, to the effect that Smith was focusing on dynamic efficiency, how fast a society would grow, while the Welfare Theorems are fundamentally about static efficiency, suggests that many current day economists misinterpret the Invisible Hand.) Also, there is no effort given in the video to even hint at the proof of the First Welfare theorem, to the extent that if there are unexploited gains from trade at current market prices, then some agent(s) can't be maximizing under their budget constraint(s). All that the video shows is that the familiar picture of Competitive Equilibrium within the Edgeworth Box results in the indifference curves of the two consumers to be tangent, the necessary condition for Pareto Optimality.

The treatment of the Second Fundamental Theorem is even more cursory because there is no discussion at all of redistributing the initial allocation. All that is noted is that if the initial allocation happens to be a Competitive Equilibrium allocation, there there will be prices to support the allocation.

This is the audio only in case the student prefers to play with the spreadsheet while listening.