With respect to the demand and supply analysis, discuss the Walrasian equilibrium and the Walrasian stability condition.

A Walrasian equilibrium is a vector of prices, and a consumption bundle for each agent, such that (i) every agent’s consumption maximizes her utility given prices, and (ii) markets clear: the total demand for each commodity just equals the aggregate endowment.

The second important idea is the notion of Pareto optimality, due to the Italian economist Vilfredo Pareto. This notion doesn’t have anything to do with equilibrium per se (although we’ll see the close connection soon). Rather it considers the set of feasible allocations and identifies those allocations at which no consumer could be made better off without another being made worse off. 

Walrasian equilibrium requires that both agents consume their Marshallian demands given prices and also that these demands are compatible. So what we want to do is set relative prices, find the Marshallian demands of the two agents, and see whether or not demand equals supply in the two markets. Figure 3(a) represents a situation where prices do not simultaneously clear the two markets. In this picture, at the given prices, agent 2 is willing to supply some amount _____ _________ ___ _______ ________ ______ _________ _______ _______ __________ _________ _____.
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