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The Arrow Debreu Model
The Arrow-Debreu Model is like a massive international swap meet, but for goods and services, and well into the future. In this big worldwide marketplace, instead of meeting only on the weekends, people commit to exchanges years, even decades, into the future, assuring each other that what they're promising will actually happen.
Here's an example to better understand it: Imagine a farmer who grows apples. He doesn't just sell apples today, but he also promises to sell apples for the next ten years. Why? Because he'd like to know he'll get a steady income from his apples. On the other side, a juice company needs no surprises about the prices or about having enough apples to make their juice. They agree to buy the farmer's apples at a set price for the next ten years too.
The Arrow-Debreu model imagines a world where this kind of deal doesn't just happens between the farmer and the juice company, but rather for all goods and services. Everyone signs contracts to buy and sell everything they'll ever need. This happens at the beginning of time, and that's supposed to assure that everyone gets what they want and need.
It's important to remember that this is a model, not the exact way the world works. These models help economists explore what could happen under certain conditions.
In conclusion, the Arrow-Debreu Model is a way to imagine the world's economy if all goods and services were traded not only in the present, but also far into the future, creating a sense of balance and certainty. It’s a theoretical concept showing that under certain assumptions, a competitive economy will always reach an equilibrium or stable state where supply meets demand.
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By TILThe Arrow-Debreu Model is like a massive international swap meet, but for goods and services, and well into the future. In this big worldwide marketplace, instead of meeting only on the weekends, people commit to exchanges years, even decades, into the future, assuring each other that what they're promising will actually happen.
Here's an example to better understand it: Imagine a farmer who grows apples. He doesn't just sell apples today, but he also promises to sell apples for the next ten years. Why? Because he'd like to know he'll get a steady income from his apples. On the other side, a juice company needs no surprises about the prices or about having enough apples to make their juice. They agree to buy the farmer's apples at a set price for the next ten years too.
The Arrow-Debreu model imagines a world where this kind of deal doesn't just happens between the farmer and the juice company, but rather for all goods and services. Everyone signs contracts to buy and sell everything they'll ever need. This happens at the beginning of time, and that's supposed to assure that everyone gets what they want and need.
It's important to remember that this is a model, not the exact way the world works. These models help economists explore what could happen under certain conditions.
In conclusion, the Arrow-Debreu Model is a way to imagine the world's economy if all goods and services were traded not only in the present, but also far into the future, creating a sense of balance and certainty. It’s a theoretical concept showing that under certain assumptions, a competitive economy will always reach an equilibrium or stable state where supply meets demand.