2. Utilities, Endowments, and Equilibrium

Financial Theory (ECON 251) This lecture explains what an economic model is, and why it allows for counterfactual reasoning and often yields paradoxical conclusions. Typically, equilibrium is defined as the solution to a system of simultaneous equations. The most important economic model is that of supply and demand in one market, which was understood to some extent by the Ancient Greeks and even by Shakespeare. That model accurately fits the experiment from the last class, as well as many other markets, such as the Paris Bourse, online trading, the commodities pit, and a host of others. The modern theory of general economic equilibrium described in this lecture extends that model to continuous quantities and multiple commodities. It is the bedrock on which we will build the model of financial equilibrium in subsequent lectures. 00:00 - Chapter 1. Introduction 07:04 - Chapter 2. Why Model? 13:30 - Chapter 3. History of Markets 24:41 - Chapter 4. Supply and Demand and General Equilibrium 37:59 - Chapter 5. Marginal Utility 45:20 - Chapter 6. Endowments and Equilibrium This course was recorded in Fall 2009.