General equilibrium is a state in which the supply and demand for all goods and services in an economy are in balance, resulting in an efficient allocation of resources. It represents a comprehensive view of the economy, considering the interdependence of various markets and the interactions between consumers, producers, and the government.
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General equilibrium analysis considers the interdependence of all markets in an economy, unlike partial equilibrium analysis which focuses on a single market.
The concept of general equilibrium was developed by the economist Léon Walras, who proposed a model of simultaneous market clearing through price adjustments.
In a general equilibrium, the allocation of resources is efficient, meaning that it is not possible to make one person better off without making someone else worse off.
General equilibrium theory assumes that markets are perfectly competitive, with no market power or government intervention, and that all agents have perfect information.
The achievement of general equilibrium requires the simultaneous clearing of all markets, with prices adjusting to ensure that supply equals demand in each market.
Review Questions
Explain how general equilibrium analysis differs from partial equilibrium analysis.
General equilibrium analysis takes a comprehensive view of the economy, considering the interdependence of all markets and the interactions between consumers, producers, and the government. It seeks to understand how changes in one market can affect the equilibrium in other markets, whereas partial equilibrium analysis focuses solely on the supply and demand in a single market, holding all other factors constant.
Describe the key assumptions of the Walrasian general equilibrium model.
The Walrasian general equilibrium model assumes that all markets are perfectly competitive, with no market power or government intervention, and that all agents have perfect information. It also assumes that the economy will reach a state of simultaneous market clearing, where the supply and demand in all markets are in balance through the adjustment of prices. This model was developed by the economist Léon Walras and represents a comprehensive view of the economy's interdependence.
Explain the concept of efficiency in the context of general equilibrium and how it relates to the allocation of resources.
In a general equilibrium, the allocation of resources is efficient, meaning that it is not possible to make one person better off without making someone else worse off. This is known as Pareto efficiency, where the economy is operating at the maximum possible level of social welfare. The achievement of general equilibrium requires the simultaneous clearing of all markets, with prices adjusting to ensure that supply equals demand in each market, leading to an efficient allocation of resources across the economy.
Related terms
Partial Equilibrium: Partial equilibrium analysis focuses on a single market, considering the supply and demand for a specific good or service, while holding all other factors constant.
Walrasian Equilibrium: Walrasian equilibrium is a general equilibrium model developed by the economist Léon Walras, which assumes that all markets clear simultaneously through the adjustment of prices.
Competitive Equilibrium: Competitive equilibrium is a state where the supply and demand in all markets are in balance, and no individual or firm has the ability to influence prices, leading to an efficient allocation of resources.