Walrasian Equilibrium or Disequilibrium

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This plot represents a pure exchange economy of two consumers with Cobb-Douglas preferences. The set of Pareto optimal allocations is shown in the Edgeworth box (green line). Given the price, the consumption set passes through the endowment (black dot); the orange and blue points are the associated demand points for consumers 1 and 2 respectively. When there is an excess demand on good , the orange point is to the right of the blue one; when there is an excess demand on , the orange point is higher than the blue one. Walrasian equilibrium price makes both consumers' demands coincide.

Contributed by: Loreto Llorente (March 2011)
Open content licensed under CC BY-NC-SA


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