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General Equilibrium

This document summarizes Arrow-Debreu's general equilibrium model of economics. It presents two key theorems: 1) that under certain assumptions, the set of attainable states in an economy is compact and nonempty; and 2) that under additional assumptions, a competitive equilibrium exists in the economy. The document defines key terms like attainable states, competitive equilibrium, and presents the assumptions and proofs of the two theorems at a high level.

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Saadgi Agarwal
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184 views4 pages

General Equilibrium

This document summarizes Arrow-Debreu's general equilibrium model of economics. It presents two key theorems: 1) that under certain assumptions, the set of attainable states in an economy is compact and nonempty; and 2) that under additional assumptions, a competitive equilibrium exists in the economy. The document defines key terms like attainable states, competitive equilibrium, and presents the assumptions and proofs of the two theorems at a high level.

Uploaded by

Saadgi Agarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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39

Arrow-Debreu general equilibrium model∗


Ivo Gjenero†

Abstract. Here we formulate two general theorems of Arrow-


Debreu on 1) the compactness of the attainable states of a general
model of economy and 2) the existence of a competitive equilibrium,
under fairly general assumptions.

Key words: economy, attainable state, competitive equilibrium

Sažetak. Arrow-Debreuov opći model ravnoteže. Formu-


liraju se dva vrlo općenita teorema Arrow-a i Debreu-a o 1) kom-
paktnosti dosiživih stanja jednog općenitog modela ekonomije i 2)
postojanju konkurentske ravnoteže, uz vrlo općenite pretpostavke.

Ključne riječi: ekonomija, dostiživo stanje, konkurentska ravnoteža

Let Rn denote the commodity space. For i = 1, . . . , m, let Xi ⊂ Rn denote


the i - th consumer’s consumption set, ei ∈ Rn its private endowment and ºi
its preference relation on Xi . For h = 1, . . . , k let Yh denote the j-th producer’s
production set.P Pm
m
Let X = i=1 XP
i be the total consumption set, e = i=1 ei the total
k
endowment and Y = h=1 Yh the total production set.
Let θih denote the share of the i-th consumer in the P profits of h-th producer.
m
Numbers θih are nonnegative and for each h we have i=1 θih = 1.
An economy is then described by tuple

E = ((Xi , ei , ºi ), (θih ), (Yh )).

An attainable state of the economy is an (m + k) tuple


m
Y k
Y
((xi ), (yh )) ∈ Xi × Yj ,
i=1 h=1
∗ The lecture presented at the Mathematical Colloquium in Osijek organized by Croatian

Mathematical Society - Division Osijek, November 17, 1995.


† Faculty of Economics, Department of Mathematics, Kennedyjev trg 6, HR-10 000 Zagreb,

Croatia, e-mail: [email protected]


40 I. Gjenero

satisfying
m
X k
X
xi < yh − e.
i=1 h=1

Let M denote the following set


( m k
)
X X
n(m+k)
M= ((xi ), (yh )) ∈ R : xi − yj − e < 0
i=1 h=1

and let F denote the set of all attainable states. Then


Y Y \
F = ( Xi × Yh ) M.

Let X̂i ⊆ Xi be the projection of F on Xi and let Ŷh ⊆ Yh be the projection of


F to Yh .
Theorem 1 [Debreu]. Let the economy E = ((Xi , ei , ºi ), (Yh ), (θih )) sat-
isfy:

(D1) For each i = 1, . . . , m,


Xi is closed, convex and bounded from bellow; and ei ∈ Xi .

(D2) For each h = 1, . . . , k,


Yh is closed, convex and 0 ∈ Yh .
T
(D3) Y (−Y ) = {0}.
n
(D4) −R+ ⊂Y.

(D5) There exists some xi ∈ Xi , such that xi < ei .

Then the set F of attainable states is compact and nonempty, xi ∈ X̂i (i =


1, . . . , m) and 0 ∈ Ŷh (h = 1, . . . , k).
For the proof (Debreu, 1959, p.22) it suffices to show that AF = {0}, where
AF is a recessive conus of F . (Rockafellar, 1970, §8.) For another proof see
Smale (1982).
Definition 1. A competitive equilibrium of economy

E = ((Xi , ei , ºi ), (Yh ), (θih ))

is an (m + k = 1) tuple of vectors from Rn

(p∗ , (x∗i ), (yh∗ ),


Pk
where p∗ ∈ P = {p ∈ R+ n
: j=1 pj = 1} and ((x∗i ), (yh∗ )) is an attainable state
of economy E satisfying the following three conditions:
Arrow-Debreu general equillibrium model 41

1. For each h = 1, . . . , k,
hp∗ , yh∗ i ≥ hp∗ , yh i for all yh ∈ Yh .

2. For each i = 1, . . . , m,
x∗i ºi xi for all xi ∈ βi (p∗ ),
where Pk
βi (p∗ ) = {xi ∈ Xi : hp∗ , xi i ≤ hp∗ , ei i + h=1 θih hp∗ , yh∗ i}.

Pm Pk
3. i=1 x∗i − h=1 yh∗ − e = 0.

The vector p∗ is called a vector of competitive prices.


Theorem 2 [Debreu]. Let economy E = ((Xi , ei , ºi ), (Yh ), (θih )) satisfy:

For each i = 1, . . . , m,

(R1) Xi is closed, convex and bounded from bellow; ei ∈ Xi .

(R2) There exists some xi ∈ Xi , such that xi < ei .

(R3) For all xi ∈ X̂i exists x0i ∈ Xi such that x0i  xi .

(R4) The sets {(x ∈ Xi : x ºi x0 } and {x : x00 ºi x} are closed for every
x0 , x00 ∈ Xi .

(R5) If x and x0 are two points in Xi such that mx Âi x0 and λ ∈]0, 1], then
x Âi (1 − λ)x + λx0 .

For each h = 1, . . . , k,

(R6) Yh is closed, convex and 0 ∈ Yh .


T
(R7) Y (−Y ) = {0}.
n
(R8) −R+ ⊂Y.

Then there exists a competitive equilibrium of the economy E. For the proof
see Debreu (1959, 1982). The proof uses the conclusions of Theorem 1 and
Kakutani fixed point theorem for point to set mapping.

References
[1] G. Debreu, Theory of Value, New York, Wiley, 1959.
42 I. Gjenero

[2] G. Debreu, Existence of Competitive Equilibrium, Chapter 15 in:


Handbook of Mathematical Economics, vol II, M. D. Intrrilligator and
K. J. Arrow,eds., North Holland, Amsterdam, 1982.

[3] R. T. Rockafellar Convex Analysis, Princeton University Press, Prince-


ton, 1970.
[4] S. Smale, Global Analysis and Economics, Chapter 8 in: Handbook of
Mathematical Economics, vol II, M. D. Intrrilligator and K. J. Arrow, eds.,
North Holland, Amsterdam, 1982.

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