39
Arrow-Debreu general equilibrium model∗
Ivo Gjenero†
Abstract. Here we formulate two general theorems of Arrow-
Debreu on 1) the compactness of the attainable states of a general
model of economy and 2) the existence of a competitive equilibrium,
under fairly general assumptions.
Key words: economy, attainable state, competitive equilibrium
Sažetak. Arrow-Debreuov opći model ravnoteže. Formu-
liraju se dva vrlo općenita teorema Arrow-a i Debreu-a o 1) kom-
paktnosti dosiživih stanja jednog općenitog modela ekonomije i 2)
postojanju konkurentske ravnoteže, uz vrlo općenite pretpostavke.
Ključne riječi: ekonomija, dostiživo stanje, konkurentska ravnoteža
Let Rn denote the commodity space. For i = 1, . . . , m, let Xi ⊂ Rn denote
the i - th consumer’s consumption set, ei ∈ Rn its private endowment and ºi
its preference relation on Xi . For h = 1, . . . , k let Yh denote the j-th producer’s
production set.P Pm
m
Let X = i=1 XP
i be the total consumption set, e = i=1 ei the total
k
endowment and Y = h=1 Yh the total production set.
Let θih denote the share of the i-th consumer in the P profits of h-th producer.
m
Numbers θih are nonnegative and for each h we have i=1 θih = 1.
An economy is then described by tuple
E = ((Xi , ei , ºi ), (θih ), (Yh )).
An attainable state of the economy is an (m + k) tuple
m
Y k
Y
((xi ), (yh )) ∈ Xi × Yj ,
i=1 h=1
∗ The lecture presented at the Mathematical Colloquium in Osijek organized by Croatian
Mathematical Society - Division Osijek, November 17, 1995.
† Faculty of Economics, Department of Mathematics, Kennedyjev trg 6, HR-10 000 Zagreb,
Croatia, e-mail: gjenero@[Link]
40 I. Gjenero
satisfying
m
X k
X
xi < yh − e.
i=1 h=1
Let M denote the following set
( m k
)
X X
n(m+k)
M= ((xi ), (yh )) ∈ R : xi − yj − e < 0
i=1 h=1
and let F denote the set of all attainable states. Then
Y Y \
F = ( Xi × Yh ) M.
Let X̂i ⊆ Xi be the projection of F on Xi and let Ŷh ⊆ Yh be the projection of
F to Yh .
Theorem 1 [Debreu]. Let the economy E = ((Xi , ei , ºi ), (Yh ), (θih )) sat-
isfy:
(D1) For each i = 1, . . . , m,
Xi is closed, convex and bounded from bellow; and ei ∈ Xi .
(D2) For each h = 1, . . . , k,
Yh is closed, convex and 0 ∈ Yh .
T
(D3) Y (−Y ) = {0}.
n
(D4) −R+ ⊂Y.
(D5) There exists some xi ∈ Xi , such that xi < ei .
Then the set F of attainable states is compact and nonempty, xi ∈ X̂i (i =
1, . . . , m) and 0 ∈ Ŷh (h = 1, . . . , k).
For the proof (Debreu, 1959, p.22) it suffices to show that AF = {0}, where
AF is a recessive conus of F . (Rockafellar, 1970, §8.) For another proof see
Smale (1982).
Definition 1. A competitive equilibrium of economy
E = ((Xi , ei , ºi ), (Yh ), (θih ))
is an (m + k = 1) tuple of vectors from Rn
(p∗ , (x∗i ), (yh∗ ),
Pk
where p∗ ∈ P = {p ∈ R+ n
: j=1 pj = 1} and ((x∗i ), (yh∗ )) is an attainable state
of economy E satisfying the following three conditions:
Arrow-Debreu general equillibrium model 41
1. For each h = 1, . . . , k,
hp∗ , yh∗ i ≥ hp∗ , yh i for all yh ∈ Yh .
2. For each i = 1, . . . , m,
x∗i ºi xi for all xi ∈ βi (p∗ ),
where Pk
βi (p∗ ) = {xi ∈ Xi : hp∗ , xi i ≤ hp∗ , ei i + h=1 θih hp∗ , yh∗ i}.
Pm Pk
3. i=1 x∗i − h=1 yh∗ − e = 0.
The vector p∗ is called a vector of competitive prices.
Theorem 2 [Debreu]. Let economy E = ((Xi , ei , ºi ), (Yh ), (θih )) satisfy:
For each i = 1, . . . , m,
(R1) Xi is closed, convex and bounded from bellow; ei ∈ Xi .
(R2) There exists some xi ∈ Xi , such that xi < ei .
(R3) For all xi ∈ X̂i exists x0i ∈ Xi such that x0i  xi .
(R4) The sets {(x ∈ Xi : x ºi x0 } and {x : x00 ºi x} are closed for every
x0 , x00 ∈ Xi .
(R5) If x and x0 are two points in Xi such that mx Âi x0 and λ ∈]0, 1], then
x Âi (1 − λ)x + λx0 .
For each h = 1, . . . , k,
(R6) Yh is closed, convex and 0 ∈ Yh .
T
(R7) Y (−Y ) = {0}.
n
(R8) −R+ ⊂Y.
Then there exists a competitive equilibrium of the economy E. For the proof
see Debreu (1959, 1982). The proof uses the conclusions of Theorem 1 and
Kakutani fixed point theorem for point to set mapping.
References
[1] G. Debreu, Theory of Value, New York, Wiley, 1959.
42 I. Gjenero
[2] G. Debreu, Existence of Competitive Equilibrium, Chapter 15 in:
Handbook of Mathematical Economics, vol II, M. D. Intrrilligator and
K. J. Arrow,eds., North Holland, Amsterdam, 1982.
[3] R. T. Rockafellar Convex Analysis, Princeton University Press, Prince-
ton, 1970.
[4] S. Smale, Global Analysis and Economics, Chapter 8 in: Handbook of
Mathematical Economics, vol II, M. D. Intrrilligator and K. J. Arrow, eds.,
North Holland, Amsterdam, 1982.
