Principles of Economics

study guides for every class

that actually explain what's on your next test

General Equilibrium

from class:

Principles of Economics

Definition

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.

congrats on reading the definition of General Equilibrium. now let's actually learn it.

ok, let's learn stuff

5 Must Know Facts For Your Next Test

  1. General equilibrium analysis considers the interdependence of all markets in an economy, unlike partial equilibrium analysis which focuses on a single market.
  2. The concept of general equilibrium was developed by the economist Léon Walras, who proposed a model of simultaneous market clearing through price adjustments.
  3. 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.
  4. General equilibrium theory assumes that markets are perfectly competitive, with no market power or government intervention, and that all agents have perfect information.
  5. 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.
© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.
Glossary
Guides