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Lesson 3
Marshall vs. Walras on
Equilibrium and Disequilibrium
Ph.D. Program in Economics
University of York
February-March 2008
Introduction 1
The problem:
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Introduction 2
The manifest difference in the scope of the analysis, i.e., general vs.
partial analysis, is the necessary by-product of more fundamental
epistemological and theoretical differences
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Introduction 3
1.
2.
Walrass approach:
1.
2.
3.
4.
Marshalls approach:
3.
1.
2.
3.
4.
4.
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L = 2 commodities, indexed by l = 1, 2
I consumers-traders, indexed by i = 1, , I (I 2)
i = 1,, I,
Let:
Assume:
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Let:
Let
zi(xi) (z1i, z2i)(xi) xi - i (x1i - 1i, x2i - 2i) 2
be consumer is excess demand, when his consumption is xi
If zli(xi) > 0, then zli(xi) is called consumer is net demand proper for
commodity I and consumer i is said to be a net buyer
If zli(xi) < 0, then |zli(xi)| is called consumer is net supply for
commodity I and consumer i is said to be a net seller
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They both ignore both the notion of marginal rate of substitution and
that of reservation price.
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The three assumptions underlie not only the model of a pureexchange, two-commodity economy, but all of Walrass models (in
their final form).
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Let p = (p1, p2) 2++ be the price system, where prices are
expressed in terms of units of account and are positive in view of
the strong monotonicity of preferences.
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p 12
p 12 x 1i x 2i p 12 1i 2i ,
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z 1 p W12 , 0
z 2 p W12 , 0 ,
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I
p z p , i
i 1 12 1i 12
z 2i p 12 , i p 12 z 1 p 12 , z 2 p 12 , 0, p 12 0 .
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The first striking difference between the model and the securities
example lies in the moneyless character of the former as
contrasted with the monetary character of the latter.
On this point, however, Walras is very clear. For, a few lines after
the securities example, he adds:
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it is very likely that Walras did not initially realize the need for
such assumption as far as the pure-exchange model is
concerned;
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Walras strenuously resists the generalized adoption of the no-tradeout-of-equilibrium assumption because, together with the other two,
it turns
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Concerning generality:
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Hence, if the traders initial endowments are not all alike, the initial
allocation will change. But, the direction of change cannot be
predicted.
Similarly, even if one can predict that the trading process will come
to an end, neither the final allocation nor the final rate of exchange
can be predicted, failing further assumptions.
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29
C EB x C P EB u 1 x C1 u 1 1 , u 2 x C2 u 2 2 .
p 1
x 21
21
x 11 11
x 22
22
x 12 12
30
Finally, since
MRSi21(xi) |dx2i/dx1i|ui(xi+dxi)=u(xi) = (u(xi)/u(x1i) / (u(xi)/u(x2i),
for i = 1,2, in Marshalls true equilibrium the following condition also
holds:
u i x i u i x i
/
x 1i
x 2i
dx 2i
dx 1i
x 2i
2i
x 1i 1i
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u i x 1i , x 2i v 1i x 1i x 2i ,
i 1, 2 ,
Hence
MRS21i(xi) = (ui(x1i, x2i)/(x1i)) / (ui(x1i, x2i)/(x2i)) = v1i(x1i)
depends only on the quantity consumed of commodity 1.
Let
d1i(x1i,1i) = max {0, x1i - 1i}
be consumer is net demand proper for commodity 1 for x1i [0, 1]
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If x1i > 1i, then d1i(x1i,1i) > 0 and consumer i is a net buyer of
commodity 1; hence MRS21i(xi) = v1i(x1i) can be interpreted as a
buyers reservation price, or demand price.
If x1i < 1i, then s1i(x1i,1i) > 0 and consumer i is a net seller of
commodity 1; hence MRS21i(xi) = v1i(x1i) can be interpreted as a sellers
reservation price, or supply price.
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If the consumers tastes are not identical, then p1maxd > p1mins
Let d1(p1d) = i d1i(p1id), for p1d = p1id, for i = 1, 2 and p1d [0, );
let s1(p1s) = i s1i(p1is), for p1s = p1is, for i = 1, 2 and p1s [0, ).
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or
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d 1 p M1 s 1 p M1
d 1 p M1 s 1 p M1 0
38
Yet, in spite of its appearance, and unlike equation (2), equation (7) is
not a market-clearing equation; similarly, p1M, unlike p12W , is not a
market a market-clearing price.
In fact, in general, the two consumers will not carry out their trades at
the constant rate p1M; and yet, even if different trades take place at
different rates, at the end of the process the total quantity traded of
commodity 1 will still be equal to the common value q1(p1M).
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An illustration:
Assumption 2.
K12() = MRS211(1) = a1 > a2 = MRS212(2) = k12()
Assumption 3.
11 < 12 ; v11(1) < v12(0)
Equilibrium:
p11d(d11) = p11s(s12) and d11 = s12 . Hence:
p1M = (a1b2 + a2b1) / (b1 + b2) ;
q1M = (a1 - a2) / (b1 + b2)
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p12d,
p12s
p11s
p12
p1d,
p1s
p1maxs
v11(11)
s1(p1s)
p1maxd
p1M
v12(12)
p1mins
d1(p1d)
p1mind
p11d
11
1 -11
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p12d
d11, s11
1 - 12
12
d12, s12
q1M
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1 d , s
1
1
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q 1 p M
q 1 p M
1 s
1 d
p 1i s 1i ds 1i ,
p 1j d 1j dd 1j
0
0
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Assumption 1 (new):
No strategic or game-theoretic considerations are allowed: each
bilateral bargain is regarded as a self-contained transaction by the
two traders involved in it, so that each trader, in deciding whether to
get engaged in a bargain, takes into account only the immediate
effects of that bargain on his utility. (Edgeworth and Berry)
Assumption 2:
An individual bargain can only take place if it is weakly
advantageous for the two consumers involved in it.
Assumption 3:
Each consumer will not stop trading as long as he can increase his
utility by so doing.
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s
1
1 p 1
I I,M
d I1 p I,M
s
1
1 p 1 0 ,
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willing to sell
willing to buy
37s.
1000 quarters
600 quarters
36s.
700
"
700
"
35s.
600
"
900
"
47
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With only two traders, the marginal rate of exchange at which the last marginal
trade occurs necessarily coincides with both the marginal demand price of the only
marginal buyer, p1d(q1(p1M)), and the marginal supply price of the only marginal
seller, p1s(q1(p1M)).
But in Marshall's "temporary equilibrium" model there are more than two traders in
the economy: hence, in general, not only there may exist more than one marginal
buyer or seller, but also there may be some buyers or sellers that are not marginal.
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Conclusions 1
Secondly, it has been shown that, starting from such different sets of
assumptions, the two authors arrive at entirely different models of
the pure-exchange, two-commodity economy.
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Conclusions 2
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