Definition§
General Equilibrium Analysis refers to a theoretical framework in economics that aims to explain how supply and demand balance out across all markets in an economy simultaneously. Unlike partial equilibrium analysis, which looks at a single market in isolation, general equilibrium analysis takes into account the interdependencies and interactions among multiple markets. It helps to understand how economic variables (such as prices, wages, and output) settle at levels where all markets are in equilibrium.
Key Features§
- Simultaneity: Examines all markets at the same time.
- Interconnectedness: Recognizes the interdependent nature of markets.
- Equilibrium Conditions: Determines conditions where supply equals demand across all markets.
Examples§
- Two-Market Model: Involving the labor market and the goods market where the equilibrium in both markets determines wages and the prices of goods simultaneously.
- Economy-Wide Application: Analysis where the input markets (like labor and capital) and output markets (for various goods and services) all reach a state of equilibrium, considering mutual feedback.
Frequently Asked Questions§
What is the main difference between partial and general equilibrium analysis?§
Partial equilibrium analysis examines only one market, ignoring interactions with other markets, while general equilibrium analysis examines multiple markets and their interconnections simultaneously.
Who is the founding father of general equilibrium theory?§
Léon Walras is often credited as the founding father of general equilibrium theory with his development of the Walrasian model.
What key assumptions are made in general equilibrium models?§
Common assumptions include perfect competition, rational behavior, perfect information, and the presence of market-clearing prices.
How is general equilibrium analysis useful in policy-making?§
It helps policymakers predict the ripple effects of economic policies or shocks across various sectors of the economy.
Related Terms§
- Partial Equilibrium Analysis: Analysis limited to a single market without considering interactions with other markets.
- Walrasian General Equilibrium: A general equilibrium model developed by Léon Walras encompassing supply and demand in all markets.
- Pareto Efficiency: A state where resources are allocated in the most efficient manner, such that no one can be made better off without making someone else worse off.
- Market Interdependencies: The concept that the conditions in one market can affect supply and demand in another market.
Online References§
- Investopedia: General Equilibrium Theory
- Wikipedia: General Equilibrium Theory
- Stanford Encyclopedia of Philosophy: General Equilibrium Theory
Suggested Books for Further Studies§
- “General Equilibrium Analysis: A Micro-Economic Text” by Melvyn B. Krauss
- “The Theory of General Economic Equilibrium: A Differentiable Approach” by Andreu Mas-Colell
- “General Equilibrium and Market Microstructure: Essays in Economic Theory” by Andreu Mas-Colell, Michael D. Whinston, and Jerry R. Green
Fundamentals of General Equilibrium Analysis: Economics Basics Quiz§
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