Editing Arrow–Debreu model (section)

=== Intuitive description of the Arrow–Debreu model ===
The Arrow–Debreu model models an economy as a combination of three kinds of agents: the households, the producers, and the market. The households and producers transact with the market but not with each other directly.

The households possess endowments (bundles of commodities they begin with), one may think of as "inheritance." For mathematical clarity, all households must sell all their endowment to the market at the beginning. If they wish to retain some of the endowments, they would have to repurchase them from the market later. The endowments may be working hours, land use, tons of corn, etc.

The households possess proportional ownerships of producers, which can be thought of as [[joint-stock companies]]. The profit made by producer <math>j</math> is divided among the households in proportion to how much stock each household holds for the producer <math>j</math>. Ownership is imposed initially, and the households may not sell, buy, create, or discard them.

The households receive a budget, income from selling endowments, and [[dividend]] from producer profits. The households possess preferences over bundles of commodities, which, under the assumptions given, makes them [[Utility maximization problem|utility maximizers]]. The households choose the consumption plan with the highest utility they can afford using their budget.

The producers can transform bundles of commodities into other bundles of commodities. The producers have no separate utility functions. Instead, they are all purely profit maximizers.

The market is only capable of "choosing" a market price vector, which is a list of prices for each commodity, which every producer and household takes (there is no bargaining behavior—every producer and household is a [[price taker]]). The market has no utility or profit. Instead, the market aims to choose a market price vector such that, even though each household and producer is maximizing their utility and profit, their consumption and production plans "harmonize." That is, "[[Market clearing|the market clears]]". In other words, the market is playing the role of a "[[Walrasian auctioneer]]."

{| class="wikitable"
|+How an Arrow–Debreu model moves from beginning to end.
!households
!producers 
|-
|receive endowment and ownership of producers
|
|-
|sell all endowment to the market
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|-
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|plan production to maximize profit
|-
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|enter purchase agreements between the market and each other
|-
|
|perform production plan
|-
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|sell everything to the market
|-
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|send all profits to households in proportion to ownership
|-
|plan consumption to maximize utility under budget constraint
|
|-
|buy the planned consumption from the market
|
|}