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I'm a beginer of microeconomics.

According to consumer behavior theory, a consumer possesses a set number of money as budget constraint at first. And their is negative income elasticity of demand and extremely positive income effect for giffen goods. In contrary, the man who demand Veblen goods will increase his quantity demanded if price increase.

But in chapter general equilibrium, I was informed that their is no money in this model, and the 'number' of price are used to indicate relative price, not absolute one (I learned that from Intermediate Microeconomics:A Modern Approach by Hal R. Varian, and a textbook self-complied by the school). I am confused that if their is no money, are the changes of income and price samely relative in partial equilibrium model? Or the 'number' of them are absolute? How can we witness giffen effect and Veblen effect in general equilibrium model?

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  • $\begingroup$ Could you please provide references for the sources where you learned that? $\endgroup$ – 1muflon1 Apr 5 at 18:40
  • $\begingroup$ I learned that from Intermediate Microeconomics:A Modern Approach by Hal R. Varian, and a textbook self-complied by the school. $\endgroup$ – TheAngryToad Apr 5 at 19:36
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In general, what you are referring to is what we call numeraire pricing. This means that the prices, as you mentioned, are relative to one of the goods (you can pick any good as a numeraire, which is how we measure prices through the whole economy).

The reason for this is Walras' Law states (basically) that since we have a bunch (say $N$) goods in the economy, and say we have a bunch (again, $N$) markets in the economy, then solving all of these will leave one redundant equation. This applies in particular to general equilibrium because there are essentially more equations than variables, and hence you have one (or more) redundant variable(s) at the end.

To get a little more technical if you want: if money is something that we can consume, then we would insert cash as an additional good and make that our numeraire. Thus we can have "money," in the sense that it has a value as a bubble, and we can include it as a good in our utility.

To answer your questions about Veblen/Giffen effects, we can still observe these effects, they have nothing to do with money. These effects in their essence are talking about goods that we buy more of when the price increases. Even if this price is in terms of "money" or a numeraire, the point is that we buy it when it's more expensive to us, so we push other things that we might need out of the way in order to buy this.

A quick example (don't think too deeply about it, it's just an illustration) would be college in America, using, say, $1 McDonald's McChicken sandwiches as a numeraire. An argument could be made that each year more students attend college yet the price in terms of McChickens goes up each year ((i.e., consumption increases, as the price goes up). This could be described by the Veblen effect, where we maybe don't want to be perceived as someone with "only" an associate's degree or high school degree (not that those are bad, but it's just the way things are in America). If I measured in dollars or McChickens, the Giffen or Veblen effect doesn't change.

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  • $\begingroup$ However, your example is just a partial equilibrium model, not general one. In general equilibrium model, everyone become both buyer and seller, and both consumer and producer. Suppose that there are just a producer: Mcdonald, buying labor from students and selling sandwiches to them, and consumers: students, buying sandwiches from Mcdonald and selling labor to it. What is the meaning of income and price change? $\endgroup$ – TheAngryToad Apr 17 at 14:56
  • $\begingroup$ Right so in this economy, the unit of currency is a numeraire is in terms of Mcdonald's sandwiches. If I am a student, my "income" would be comprised of the any free endowment (say my parents buy me a sandwich) and my wage from working (in terms of sandwiches). For McDonald's, their realized gains is in terms of sandwiches. Since the sandwiches are a method of measuring price, we can describe income changes as an increase in sandwiches and price changes as the change in value in terms of sandwiches. $\endgroup$ – Pavan C. Apr 18 at 6:08
  • $\begingroup$ The point is that with a numeraire, you can value everything in the economy in terms of one good (in real life, that good is "cash" money). Not just partial equilibrium, but every market in the whole economy can be measured in sandwiches, and thus there is no need for currency measurement. We only need to measure in terms of the numeraire. And this is allowed because Walras' Law says this is completely okay since we have one redundant equation anyways (one more equation than variable). $\endgroup$ – Pavan C. Apr 18 at 6:11
  • $\begingroup$ In this model, giffen effect is that if McDonald returns less sandwiches for per labor, meaning that sandwiches become more expensive and labor(and leisure) becomes cheaper, then contrastly student work harder than before, meaning that student prefer more expensive sandwiches than cheaper leisure. Your example that increase of the quantity of students leads to increase of the price of sandwiches is not giffen effect. It just a simple supply-demand analysis. $\endgroup$ – TheAngryToad Apr 19 at 5:17

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