Non-Strategic Decisions in Multi-Agent Environments
This setting tests the core logic of the relationship between supply-and-demand and prices, building on the tests of optimal behavior in Production Decisions in Non-Strategic Environments and Consumption Decisions in Non-Strategic Environments. Economists refer to “general equilibrium” as the process where equilibrium prices and quantities emerge with a large number of non-strategic, price-taking market participants interact. Unlike the strategic models found in STEER, the assumption is that the market interactions that lead to this equilibrium occur through an unspecified process that clears markets (i.e., a “Walrasian auctioneer” or “invisible hand”).
In particular, for non-strategic settings, all market participants take prices as given and choose the quantity demanded or supplied in each market. For example, consumers jointly decide on the quantity demanded of goods and services given relative prices, and the quantity of labor supplied given a wage. Simultaneously, producers choose the quantity supplied of the good and the demand of each factor of production. With a large number of non-strategic market participants we can test the agent's ability to aggregate all of their supply and demand functions to calculate a market-level supply and demand. Finally, given the aggregated supply and demand functions for each market, we can test whether an agent can find the market clearing price where supply is equal to demand in equilibrium—given their internal model of all the market participants.
In this section, we organize by markets rather than by the role of a decision maker, as in the previous sections. For example, in the goods market we first ensure agents understand how individual demand functions from Deriving Demand aggregate to a market demand function for the good given a price, then that the agent understands how to aggregate the output from each producer at a given price from Comparative Statics with Production, and finally that the agent is able to calculate the price which would equate demand and supply and clear the market in a non-strategic setting. Factor markets are treated similarly.
Finally, given a system of equations that defines an equilibrium price we can perturb primitives (e.g., technological factors, distortions on decisions such as tax rates, or exogenous prices not determined in equilibrium) to see how the market clearing price would respond. That is an essential tool for agents to be able to reason about the impact of interventions and distortions in Evaluating Equilibria and Externalities.
Modules
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4.1Consumer Goods Market Aggregation
The market clearing prices in general equilibrium arise from the separate market-level demand and supply curves, which sums the demand or supply across all market participants at a given price.
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4.2Factor Market Aggregation
As with the case of the goods market in Consumer Goods Market Aggregation the market demand and supply for factors of production are essential to find the market clearing price.
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4.3Prices in Static Market Equilibrium
In this setting we test the agent's ability to reason about how prices emerge in a non-strategic setting as a process of equating supply and demand, which in turn relies on their ability to aggregate those market demand functions from consumer and producer behavior.
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4.4Comparative Statics of Equilibrium Prices
Here, we test whether agents can reason about how prices and allocations (e.g., labor, capital, and goods) would respond to changes in the environment.