Answer to Question #235233 in Macroeconomics for Fungai

Question

QUESTION ONE:

1.1 Discuss the ‘General Equilibrium’ concept and its simplifying assumptions. (12 marks)

1.2 Using an Edgeworth box and practical examples, discuss the ‘gains from trade’ aspect of a ‘two agent’ economy. (13 marks)

Answer 1

1.1

General equilibrium concept shows how supply and demand interact to balance the economy. Its assumption are that there is perfect competition in the market and income of consumers are constant.

1.2

In free trade , the consumers are presented with variety of products in the market to choose from. For example as shown the market has variety of products including bananas and coconuts.