6 Internal Review
6.2 Implementing Grounding Research
1.0 Introduction 2.0 Objectives 3.0 Main Content
3.1 Concept of Equilibrium in Economics 3.2 Types of Equilibrium in Economics
3.2.1 Partial Equilibrium Analysis 3.2.3 General Equilibrium Analysis
3.3 Importance of Equilibrium in Economic Analysis 4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment 7.0 References/Further Readings 1.0 INTRODUCTION
This unit focuses on concept of equilibrium in economics, partial equilibrium analysis, general equilibrium analysis and importance of equilibrium in economic analysis.
2.0 OBJECTIVES
After successful study of this unit, students should be able to do the following:
• Explain the meaning of equilibrium in economics
• Discuss the types of equilibrium in economics
• Explain why equilibrium is important in economic analysis 3.0 MAIN CONTENT
3.1 Concept of Equilibrium in Economics
Economic equilibrium is a state in which economic forces are balanced such that economic variables remain unchanged from their stability values in the absence of external stimuli.
Economic equilibrium is also known as market equilibrium. The point of equilibrium represents a theoretical state of stability where all economic transactions that ought to take place with respect to the initial state of all relevant economic variables have taken place.
3.2 Types of Equilibrium in Economics
3.2.1 Partial Equilibrium/Marshallian Analysis: This is the type of equilibrium analysis that determinesthe price of one good with the assumption that prices of all other goods remain constant. A good example of Partial Equilibrium is Marshallian theory of demand and supply.
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3.2.3 General Equilibrium/Walrasian equilibrium Analysis: This is Walrasian (Léon Walras, 1874) type of equilibrium analysiswhere determination of price of a good is considered within the context of several interacting markets. In effect, general equilibrium analyzes numerous markets in the quest of ascertaining interaction of demand and supply in an all-inclusive equilibrium.
For an economy to be in general equilibriumevery consumers, every firm, every industry and every factor-service are in equilibrium simultaneously and they are interlinked through commodity and factor prices. Therefore, general equilibrium exists when all prices are stable;
every consumer spends income in a manner that yields the maximum utility; every firms in every industry is in equilibrium at all prices and output while demand and supply for productive resources are synchronized.
Table 1: Difference between Partial and General Equilibrium
General Equilibrium Partial Equilibrium
General equilibrium theory analyzes many markets.
Partial equilibrium theory only analyzes single markets.
Analyzes more than one variable Analyzes single variable All markets are cleared at a given price level
in both product and factor markets
Only one market is cleared at a given price level.
There is an effect on other sectors due to change in one sector.
Other sectors of economy are not affected due to change in one sector.
Different sectors of the economy are jointly interdependent.
Based on assumption of Ceteris Paribus.
Prices of goods are determined simultaneously and mutually.
With Ceteris Paribus assumption, price of a good is determined.
Stable Equilibrium and Unstable equilibrium should be considered as well SELF ASSESSMENT EXERCISE
Differentiate between partial and general equilibrium analysis
3.3 Importance of Equilibrium Analysis in Economic Analysis (a) Useful in explaining functions of price system in the economy (b) Useful in providing basis for the input-output analysis
(c) Useful for analyzing problems of the market together with the working of the economic system
(d) It provides basis for evaluating determinants of the patterns of the economy
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SELF ASSESSMENT EXERCISE
Describe in your own words role of equilibrium in economic analysis 4.0 CONCLUSION
Economic equilibrium is a fundamentally theoretical construct that may never actually occur in an economy because the conditions underlying demand and supply are often dynamic and uncertain. Consequently, given that the state of all relevant economic variables changes constantly, it would be difficult for any economy to actually reach economic equilibrium in practice.
5.0 SUMMARY
In this unit, we have been able to discuss the concept of equilibrium in economics, types of equilibrium in economics as well as the importance of equilibrium in economic analysis.
6.0 TUTORED MARKED ASSIGNMENTS
1. Briefly give an overview equilibrium analysis in economics.
2. In what ways is partial equilibrium analysis different from general equilibrium analysis?
3. Describe the rationale for equilibrium analysis in economics 7.0 REFERENCES/FURTHER READINGS
Black, Fischer (1995). Exploring General Equilibrium. Cambridge, MA: MIT Press.
Eaton, B. Curtis; Eaton, Diane F.; & Allen, Douglas W. (2009). "Competitive General Equilibrium". Microeconomics: Theory with Applications (7th ed.). Toronto: Pearson Prentice Hall.
Kubler, Felix (2008). "Computation of General Equilibria: New developments". The New Palgrave Dictionary of Economics (2nd ed.).
McKenzie, Lionel W. (1981). "The Classical Theorem on Existence of Competitive Equilibrium"
(PDF). Econometrica 49 (4): 819 - 841.
McKenzie, Lionel W. (1983). "Turnpike Theory, Discounted Utility, and the von Neumann Facet". Journal of Economic Theory 30 (2): 330 - 352.
McKenzie, Lionel W. (1987). "General equilibrium". The New Palgrave: A Dictionary of Economics. 2. pp. 498 - 512.
McKenzie, Lionel W. (1999). "Equilibrium, Trade, and Capital Accumulation". Japanese Economic Review 50 (4): 371–397.
Robert W. Clower & Peter W. Howitt (1996). "Taking Markets Seriously: Groundwork for a Post-Walrasian Macroeconomics", in David Colander, ed., Beyond Microfoundations, pp.
21–37.
Robert W. Clower (1993). "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature 31(2), pp. 732 - 761.
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Robert W. Clower (2008). "Non-clearing markets in general equilibrium," in The New Palgrave Dictionary of Economics, (2nd ed.).
Scarf, Herbert E. (2008). "Computation of General Equilibria". The New Palgrave Dictionary of Economics (2nd ed.).
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MODULE 2: MATRIX ALGEBRA, SYSTEM OF LINEAR EQUATIONS AND MATRIX