The Purpose of Life in Economics by Lall Ramrattan & Michael Szenberg

Author:Lall Ramrattan & Michael Szenberg
Language: eng
Format: epub
ISBN: 9783031170652
Publisher: Springer International Publishing

(1)

where is the state of the economy with Consumers, Producers, is preference relationships, and is endowment for each . is price, and is output. Gerard Debreu extended the definition of the endowment to accommodate the share of profits. This is accomplished by defining a share of production and adding it to the agent’s endowment. The share is defined by a constant , where The augmented endowment equation then would be a new variable for the share of income (Debreu, 1959, pp. 90,102), namely, .

The expression on the left-hand side of Eq. (1) represents the Arrow-Debreu general equilibrium model (Arrow & Debreu, 1954; Debreu, 1959). Under the discussion of uncertainty, a commodity is contingent, like an HMO, which pays if you need health care. Production plans will be a present value of the maximum difference between contingent output and contingent input.

The general equilibrium framework incorporates uncertainty and expectation. Time dates goods to reflect when they are exchanged, and exchange is conditioned on the state of nature that exists at the time of exchange. This approach prescribes one clearing date for all future markets, which avoids the need to specify an equation of expectation formation in the model. On the other hand, one can think of the future market as comprised of a series of spot markets, allowing for the setting of current price based on future expectation. One can see the possibility of building in how agents process different information regarding demand and supply shocks. With this second type of interpretation, the price distribution resulting from solving the market equation for equilibrium can be different from the price distribution agents used to form their expectation (Lucas, 1983, p. 285).

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