Arrow–Debreu model

A general-equilibrium model in which consumers and firms trade commodities distinguished by delivery date and uncertain state. It represents uncertainty through markets for contingent claims.

General equilibrium theory: The study of prices and allocations that balance supply and demand across an entire economy. The model is a foundational framework for economy-wide price and allocation equilibrium.
State-contingent commodity: A good specified by its delivery date and the state of the world in which it is delivered. These goods let the model represent uncertainty as ordinary commodity trade.
Léon Walras: A nineteenth-century French economist who developed an early mathematical account of general equilibrium. Walras’s system of interdependent markets supplied a major intellectual precursor.
First welfare theorem: A theorem stating that, under standard assumptions, competitive equilibria are Pareto efficient. The model provides a canonical setting for proving efficiency of competitive allocations.
Temporary equilibrium: An equilibrium concept that clears current markets while treating expectations about the future as given. Unlike the model’s full forward market system, it does not require markets for every future contingency.
Walrasian equilibrium: An allocation and price system in which consumers optimize and all markets clear. An Arrow–Debreu equilibrium is a Walrasian equilibrium over dated, state-contingent goods.
Commodity price: The amount of value assigned to one unit of a particular good in an exchange system. A distinct price for each dated, state-contingent good guides demand and production.
Kenneth Arrow: An American economist whose work shaped modern general-equilibrium theory and the economics of uncertainty. Arrow helped establish the model’s rigorous treatment of equilibrium and uncertain states.
Second welfare theorem: A theorem stating that, under suitable convexity conditions, Pareto-efficient allocations can be decentralized as competitive equilibria. Its equilibrium framework separates efficient allocation from the distribution of initial resources.
Sequential market model: An intertemporal model in which agents trade assets over time as uncertainty is revealed. It represents contingent trade through asset holdings and later markets rather than one complete commodity market.

Linked from 7 pages