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 * 1) Partial Equilibrium 

As defined by George Stigler, "A partial equilibrium is one which is based on only a restricted range of data; a standard example is price of a single product, the prices of all other products being held fixed during the analysis."

Partial equilibrium analysis is the analysis of an equilibrium position for a sector of the economy or for one or several partial groups of the economic unit corresponding to a particular set of data. This analysis excludes certain variables and relationship from the totality and studies only a few selected variables at a time. In other words, this method considers the changes in one or two variables keeping all others constant, i.e., ceteris paribus (others remaining the same). The ceteris paribus is the crux of partial equilibrium analysis.

Thus, the type of analysis where we do not take into account the interrelation ship or inter dependence between prices of commodities or between prices of commodities and factor of production is called partial equilibrium analysis. In this partial equilibrium analysis each product or factor market is considered as interdependent and self contained for the proper explanation of the determination of price and quantity of a commodity or a factor.

Partial equilibrium analysis is not useful and relevant to apply when there is interrelationship between commodities or between factors. When markets for various commodities and factors are interdependent, that is, when changes in the price of a commodity or a factor have important repercussions on the demand for other commodities or factors, partial equilibrium analysis would not yield correct results. In such cases when there is significant inter-relationship between various markets or that the changes in one market would significantly affect others we should employ general equilibrium analysis which considers simultaneous equilibrium of all markets taking into account all effects of changes in prices in one market over others. It may be mentioned that both types of analyses are useful, each being valuable in its one way. Partial equilibrium is useful when the changes in conditions in one market value have little repercussions on other markets. However, when the changes in conditions in one market have significant effects on the other markets, general equilibrium analysis should be used. Thus in partial equilibrium analysis when we consider the determination of market price of a commodity we assume that prices of other goods do not change.

For example, the rise in price of petrol following imposition of a tax on it would cause little effect on the prices of goods such as wrist-watches and in turn there would be negligible feedback effect of changes in price of wrist-watches on the demand and prices of petrol. If prices of petrol and only wrist watches are to be considered and since there are little repercussions of changes in prices of petrol on wrist-watches the use of partial equilibrium analysis of price determination of petrol will be quite reasonable. However, when market for automobiles is considered, the rise in the price of petrol would have an important effect on their demand and price. Therefore, the assumptions of partial equilibrium analysis that price of automobiles would remain constant, when the prices of petrol changes would be seriously wrong. This is because petrol and automobiles being complements to each other, their markets are inter-related and mutually inter-dependent and changes in their prices would significantly affect each other. In such cases when there exists inter-relationship and inter-dependence of the markets for goods (whether they are complements or substitutes), the general equilibrium analysis should be used. Hence, Partial Equilibrium analysis is considered to be useful only in constricted markets.


 * Assumptions 


 * 1) Commodity price is given and constant for the consumers.
 * 2) Consumer’s taste and preferences, habits, incomes are also considered to be constant.
 * 3) Prices of prolific resources of a commodity and that of other related goods (substitute or complimentary) are known as well as constant.
 * 4) Industry is easily availed with factors of production at a known and constant price compliant with the methods of production in use.
 * 5) Prices of the products that the factor of production helps in producing and the price and quantity of other factors are known and constant.
 * 6) There is perfect mobility of factors of production between occupation and places.

The above mentioned points relate to a perfectly competitive market but can be further extended to monopolistic competition, oligopoly, monopoly and monospony markets.


 * Applications

The Supply and demand model is a partial equilibrium model where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets. In other words, the prices of all substitutes and complements, as well as income levels of consumers are constant. This makes analysis much simpler than in a general equilibrium model which includes an entire economy.

Applications of partial equilibrium discusses, when does an individual, a firm, a industry, factors of production attain their equilibrium points-


 * 1) A consumer is in a state of equilibrium when he achieves maximum aggregate satisfaction on the expenditure that he makes depending on the set of conditions relating to his tastes and preferences, income, price and supply of the commodity etc.
 * 2) Producers’ equilibrium occurs when he maximizes his net profit subject to a given set of economic situations.
 * 3) A firm’s equilibrium point is when it has no inclination in changing its production i.e when it has attained the optimum size when is ideal from the viewpoint of profit and utilisation of resources at its disposal.

In short run Marginal revenue = Marginal Cost and in long run Long run Marginal Cost = Marginal Revenue = Average Revenue = Long run Average Cost at its minimum are the conditions of equilibrium. It means that the firm is earning only a ‘normal profit’ and has no intention of leaving the industry.


 * 1) Equilibrium for an industry happens when there is normal profit made by an industry It is such a situation when no new firm wants to enter into it and the existing firm does not want to exit. Only one price prevails in the market for a single product where the quantity of goods purchased by a buyer = total quantity produced by different firms. All the firms produces till that level where Marginal Cost = Marginal revenue, and sells the product at market price ruling at that point of time. Equilibrium of an industry shows that there is no incentive for new firms to enter it or for the existing firms to leave it. This will happen when the marginal firm in the industry is making only normal profit, neither more nor less. In all these cases; those who have incentive to change it have no opportunity and those who have the opportunity have no incentive.
 * 2) Factors of production, i.e. land, labor, capital and entrepreneurs are in equilibrium when they are paid the maximum possible so as maximize the income. Here the Price = Marginal Revenue Product. At this price it does not have any enticement to look for employment anywhere else.

The quantity of factors which its owners want to sell should be the quantity which the entrepreneurs are ready to hire.


 * Limitations


 * 1) It is restricted to one particular field, be it a case of an individual, a firm or an industry. It does not take into account the study of the entire economy.
 * 2) It lacks the ability to study the interrelations of all the parts of the economy.


 * 1) This analysis will fail if the improbable assumptions, which disconnect the study of specific market from the rest of the economy, are not taken into consideration.
 * 2) It has been unsuccessful in explaining the outcome of economic disturbance in the market that leads to demand and supply changes, moving from one market to another and thus instigating second, third order waves of change in the whole economy.


 * 1) General Equilibrium

General equilibrium is a market situation where demand and supply requirements of all decision makers (buyers and sellers) have been satisfied without creating surpluses or shortages.

Leon Walras (1834-1910), a Neoclassical economist, in his book ‘Elements of Pure Economics’, created his theoretical and mathematical model of General Equilibrium as a means of integrating both the effects of demand and supply side forces in the whole economy. Walras’ Elements of Pure Economics provides a succession of models, each taking into account more aspects of a real economy. General equilibrium theory is a branch of theoretical microeconomics. The partial equilibrium analysis studies the relationship between only selected few variables, keeping others unchanged. Whereas the general equilibrium analysis enables us to study the behaviour of economic variables taking full account of the interaction between those variables and the rest of the economy. In partial equilibrium analysis, the determination of the price of a good is simplified by just looking at the price of one good, and assuming that the prices of all other goods remain constant.


 * Need and Scope

A fundamental feature of any economic system is the interdependence among its constituent parts. The markets of all commodities and all productive factors are interrelated, and the prices in all the markets are simultaneously determined. For example, consumer demands for various goods and services depend on their tastes and incomes. In turn, consumer incomes depend on the amounts of resources they own and factor prices. Factor prices depend on demand and supply of various inputs. The demand for factors by firms depends not only on the state of technology but also on the demands for the final goods they produce. The demands for these goods depend on consumers’ incomes, which depends on the demand for the factors of production. This circular interdependence of the activity within an economic system can be illustrated with a simple economy composed of two sectors, a consumer sector, which includes households and a business sector, which includes firms. It is assumed that: (a) all production takes place in the business sector, (b) all factors of production are owned by the households, (c) all factors are fully employed, (d) all incomes are spent, (e) there is no government sector and foreign sector, (f) the production of intermediate goods is excluded.

The economic activity in the systems takes the form of two flows between the consumer sector and the business sector: a real flow and a monetary flow which can be seen in the following diagram: The real flow is the exchange of goods for the services of factors of production: firms produce and offer final goods to the household sector, and consumers offer to firms the services of factors which they own.

The monetary flow is the real flow expressed in monetary terms. The consumers receive income payments from the firms for offering their factor services. These incomes are spent by consumers for the acquisition of the finished goods produced by the business sector. The expenditures of firms become the money incomes of the households. Similarly, the expenditures of households for the factor services which they supply.

The real flow and the monetary flow, which represents the transactions and the interdependence of the two sectors, move in opposite directions. They are linked by the prices of goods and the factor services. The economic system is in equilibrium when a set of prices is attained at which the magnitude of the income flow from firms to households is equal to the magnitude of the money expenditure flow from households to firms.

The interdependence of market is concealed by the partial equilibrium approach. Market consists of buyers and sellers. Thus an economic system consists of millions of economic decision-making units who are motivated by self-interest. Each one pursues his own goal and strives for his own equilibrium independently of the others. In traditional economic theory the goal of decision- making agent, consumer or producer, is maximization of something. The consumer maximises satisfaction subject to a budget constraint. The firm maximizes profit, subject to the technological constraint of the production function. A worker determines his supply of labour by maximizing satisfaction derived from work-leisure opportunities, subject to a given wage rate.

The problem is to determine whether the independent, self-interest motivated behavior of economic decision-makers is consistent with each individual agent’s attaining equilibrium. All economic units, whether consumers or producers or suppliers of factors, are interdependent. General equilibrium theory deals with the problem of whether the independent action by each decision-maker leads to a position in which equilibrium is reached by all. A general equilibrium is defined as a state in which all markets and all decision-making units are in simultaneous equilibrium. A general equilibrium exists if each market is cleared at a positive price, with each consumer maximizing satisfaction and each firm maximizing profit.

The scope of general equilibrium analysis is the examination of how this state can, if ever, be reached that is, how prices are determined simultaneously in all markets, so that there is neither excess demand nor excess supply, while at the same time the individual economic units attain their own goals.

The interdependence between individuals and markets requires that equilibrium for all product and factor markets as well as for all participants in each market must be determined simultaneously in order to secure a consistent set of prices. General equilibrium emerges from the solution of a simultaneous equation model, of millions of equations in millions of unknowns. The unknowns are the prices of all factors and all commodities and the quantities purchased and sold (of factor and commodities) by each consumer and each producer. The equations of the system are derived from the maximizing behavior of consumers and producers and are of two types: behavioral equations describing the demand and supply functions in all market by all individuals, and clearing the market equations.

General equilibrium can be explained by using several theorems. First Fundamental Theorem, Second Fundamental Theorem and Sonnenschein-Mantel-Debreu Theorem are the major theorems of general equilibrium.

There are two major theorems presented by Kenneth Arrow and Gerard Debreu in the framework of general equilibrium:


 * 1) The first fundamental theorem is that every market equilibrium is Pareto optimal under certain conditions, and
 * 2) The second fundamental theorem is that every Pareto optimum is supported by a price system, again under certain conditions.

However, three problems arise in connection with a general equilibrium:


 * 1) Does a general equilibrium solution exist? (Existence problem)
 * 2) If an equilibrium solution exists, is it unique? (Uniqueness problem)
 * 3) If an equilibrium solution exists, is it stable? (Stability problem)

These problems can best be illustrated with the partial-equilibrium example of a demand–supply model. Assume that a commodity is sold in perfectly competitive market, so that from the utility-maximising behavior of individual consumers there is a market demand function, and from the profit maximizing behavior of firms there is a market supply function. Equilibrium exists when at a certain positive price the quantity demanded is equal to the quantity supplied. The price at which QD = QS is the equilibrium price. At such a price there is neither excess demand nor excess supply. Thus an equilibrium price can be defined as the price at which the excess demand is zero: the market is cleared and there is no excess demand.

The equilibrium is stable if the demand function cuts the supply function from above. In this case an excess demand drives price up, while an excess supply (excess negative demand) drives the prices down (as referred to in diagram 1). The equilibrium is stable if the slope of the excess demand curve (EE) is negative at the point of its intersection with the vertical price-axis (as referred to in diagram 2).

The equilibrium is unstable if the demand function cuts the supply function from below. In this case an excess demand drives the price down, and an excess supply drives the price up (diagram 3). The equilibrium is unstable if the slope of the excess demand curve (EE) is positive at the point of its intersection with the vertical price-axis (diagram4).




 * Applications 


 * 1) To get an overall picture of the economy and study the problems involving the economy as a whole or even large segments / sectors of it.
 * 2) It shows that the quantities of demanded goods / factors are equal to the quantities supplied. Such a condition implies that there is a full employment of resources.
 * 3) It also provides with an ideal datum of economic efficiency. It brings out the fact that long-run competitive equilibrium is a standard of efficiency for the entire economy. Only when the competitive economy obtains general equilibrium shall its economic efficiency be at its peak and there shall be no further gains made by any reallocation of resources.
 * 4) General equilibrium also represents the state of optimum production of all commodities, because there can be no over-production or under-production under such conditions.
 * 5) It also provides an insight into the way the multitudes of individual decisions are integrated by the working of the price mechanism. It, therefore, solves the fundamental problems of a free market economy, viz., what to produce, how to produce, how much to produce, etc. This analysis shows that such decisions with regard to innumerable consumers and producers are co-ordinated by the price mechanism.
 * 6) The general equilibrium analysis also gives us the clue for predicting the consequences of an economic event.
 * 7) It also helps in the field of public policy. The formulation of a logically consistent public policy requires a complete understanding of the various sector markets and aspects of individual decision-making units, and the impact of policy on the whole economy.


 * Limitations 


 * 1) The Walrasian general equilibrium system is essentially static. It treats the coefficient of production as fixed.  It considers the supply of resources to be given and consistent. It also takes tastes and preferences of the society as fixed.
 * 2) It ignores leads and lags, for it considers everything to happen instantaneously. However, in the real world, all economic events have links with the past and the future.
 * 3) Walrasian general equilibrium analysis is of little practical utility. It involves astronomical volumes of calculations for estimating the various quantities and practices. This makes its application practically impossible.
 * 4) Last but not least, the general equilibrium analysis fails as its main assumption of perfect competition is contrary to the actual conditions prevailing in the real world.


 * Difference between Partial and General Equilibrium

SELF ASSESSMENT QUESTIONS


 * 1) In what way is General Equilibrium Analysis more useful?
 * 2) Examine the concepts of Stable and Unstable Equilibrium.
 * 3) Distinguish between Partial and General Equilibrium.

LETS SUM UP

To sum up, partial equilibrium analysis focuses on explaining the determination of prices and quantity in a given product or factor market when one market is viewed as independent of other markets. The equilibrium of a single consumer, a single producer, a single firm and a single industry are examples of partial equilibrium analysis. Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium, efficiency and comparative statics. The stringency of the simplifying assumptions inherent in this approach make the model considerably more tractable, but may produce results which, while seemingly precise, do not effectively model real world economic phenomena.

On the other hand, general equilibrium analysis deals with explaining simultaneous equilibrium in all markets when prices and quantities of all products and factors are considered as variables. A general equilibrium is defined as a state in which all markets and all decision- making units are in simultaneous equilibrium. A general equilibrium exists if each market is cleared at a positive price, with each consumer maximising satisfaction and each firm maximizing profit. General equilibrium theory is a branch of theoretical neoclassical economics. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many markets, by seeking to prove that equilibrium prices for goods exist and that all prices are at equilibrium, hence general equilibrium, is in contrast to partial equilibrium.

Need to investigate sub pages and navigation.

Wikieducator_tutorial/Thinking_about_Structure/Navigation_templates

Wikieducator_tutorial/Thinking_about_Structure/Subpages

Different types of links.

A straight up internal link has two square brackets and the name, like Bryanh

A piped internal link adds the pipe and some text, like my homepage

An external link can be created by just typing the raw url, like http://www.huffingtonpost.com

Put it in one square bracket, then add a space and some text after the url for more user friendly links, like The Huffington Post

For quotes and references, skip the extra text to get a footnote style number, like so

The following commands were discussed in the WikiEd09 session. To look at the syntax go to the edit mode.

$$\alpha$$,

$$\beta$$ $$\gamma$$,$$\pi$$,

$$\Lambda$$

$$\Pi$$, $$\lambda$$, $$\Lambda$$

Square root

$$\sqrt{x^2+y^3}$$

$$\sqrt[n]{x_1^2+y_1^2}$$

Fractions

$$\frac{x^3+z^5}{\sqrt{\omega}} $$

$$\frac{W_m}{W_f}$$

$$\frac{\alpha+\epsilon}{\lambda}$$

$$\frac{\alpha+\epsilon}{\lambda}$$

integrals

$$\int{x^2}dx$$

$$\int_0^4{x^3dx}$$

$$\iint{xydxdy}$$

$$\int_0^\infty\int_0^1xydxdy$$

$$\{abc\}$$

differentials

$$\frac{dy}{dx}$$

$$A\neq{B}$$

$$A\neq B$$

$$A \subset B$$

$$A \rightarrow B$$, $$A \uparrow B$$,$$A \Leftarrow B$$

$$\bigg \{\frac{W_m}{W_f}\bigg\}^*$$

$$\mathbf{A}\cdot\mathbf{B}$$,  $$\mathbf{A}\times\mathbf{B}$$

calligraphic letters

$$\mathcal{ANDCOLLEGE}$$

$$\mathcal{A~N~D~COLLEGE}$$

$$\frac{\partial y}{\partial x}$$

Matrices

$$\begin{matrix}0 & 1 & 2\\3 & 4 & 5\end{matrix}$$

$$\begin{pmatrix}0 & 1 & 2\\3 & 4 & 5\end{pmatrix}$$

$$\begin{bmatrix}0 & 1 & 2\\3 & 4 & 5\end{bmatrix}$$

$$\begin{vmatrix}0 & 1 & 2\\3 & 4 & 5\end{vmatrix}$$

$$\begin{Vmatrix}0 & 1 & 2\\3 & 4 & 5\end{Vmatrix}$$

$$\triangle x\triangle p\geq \hbar$$

Maths mode accent

$$\hat{A}$$,   $$\vec{A}$$,   $$\bar{A}$$,   $$\tilde{A}$$

$$\pm2^0C\longleftrightarrow$$

$$Fe^{3+}$$

stackrel

$$A\stackrel{heat}{\longrightarrow}B$$

$$\bar{h}$$

$$\hbar$$

$$\triangle{x}\triangle{p}\geq\hbar$$

$$\nabla^2{x}$$

Economics is + the study of how socities use scarce resources to produce valuable commodities and distribute them among different people - How ordinary human beings earn their living - How factors of production earn their returns
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{Macroeconomics + analyses and discusses issues impacting economy as a whole - is study of how individual firms, industries, households etc maximize their well being - is study of components like production, consumption, product pricing, demand and supply at an individual level
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{Microeconomics is - Study economic variables impacting economy as a whole + Study of economic behavior of an individual firm, industry, household, consumers etc in an economy - fall in the valuation of a firm in the market
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{The Study of Microeconomics assists in - Demand Forecasting - Price Determination - Framing the government Policies - Understanding Consumer Behaviour + All of the above
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