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The ultimate decoding of the overall economic picture: How to use the overall equilibrium theory to grasp the entire economy?
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices throughout the economy, especially in the context of multiple interacting markets. The core of this theory is that an overall equilibrium state can be achieved through the interaction of supply and demand. This theory is in contrast to the partial equilibrium theory that analyzes specific parts of the economy. In the partial equilibrium scenario, other factors are treated as constants to focus on the analysis of a specific problem, while the general equilibrium considers all markets and their interactions.
General equilibrium theory attempts to understand the overall economic situation from the bottom up, starting from individual markets and individuals.
The development of general equilibrium theory dates back to the 1870s, when French economist Léon Walras laid the foundations in his 1874 book Elements of Pure Economics. This was further developed in the mid-20th century by Lionel W. McKenzie, Kenneth Arrow, and Gérard Debreu. A theory has reached its modern form. The research by these economists not only established a complete equilibrium pricing model, but also clarified under what circumstances these equilibrium assumptions hold.
Background and Issues of General Equilibrium Theory
In general, the core of the analysis of the overall equilibrium theory is the interdependent relationship between commodity prices and production content in the market system. In this system, changes in the price of any one commodity may affect the prices of other commodities. For example, if we consider a rise in the price of bread, this will not only affect consumers’ willingness to buy bread, but may also subsequently affect bakers’ wages, causing a chain reaction in productivity and costs. This means that analyzing the equilibrium price of a good actually requires taking into account the supply and demand of all goods in the entire economy.
Calculating the equilibrium price of a commodity requires a detailed analysis of the supply and demand for millions of commodities in the market.
In economic models, different consumers or producers are assumed to be price takers. Based on this assumption, equilibrium can be divided into two categories: Walrasian equilibrium and its generalized form of transfer price equilibrium. In these models, the overall efficiency of the economy is usually considered to be based on certain basic assumptions, such as the completeness of markets and the completeness of information.
Walrasian equilibrium and the development of traditional economics
Walras was one of the first scholars in neoclassical economics to attempt to establish prices for the entire economic model. In his book The Elements of Pure Economics, he presented a series of models that took into account progressively more complex economic factors. Although Walras's theory caused heated discussions at the time and not all economists believed that his model was perfect, his research pointed out the direction for the development of economics in the 20th century.
Walras's research has triggered many discussions on the uniqueness and stability of equilibrium.
Whether in the production or consumption market, Walras's model has deepened our understanding of market forces, price mechanisms, and resource allocation. Over time, further definitions and studies of equilibrium appeared in a large number of economic works, especially in the work of Alfred Marshall and Piero Sraffa. Among the scholars influenced.
Equilibrium Explanation of Modern Economy
Modern so-called general equilibrium economics was developed particularly in the 1950s by scholars such as Kenneth Arrow, Gérald Brou and Lionel MacKenzie. In "The Theory of Value", Debreu proposed an axiomatic model that emphasized how the intervals between various commodities and time and place affect market equilibrium. This model provides an important framework for subsequent research on issues such as market failure, contracts, and risks.
Modern equilibrium models must take into account the impact of imperfect markets and uncertainty on equilibrium outcomes.
The basic focus of the overall equilibrium theory is to find out under what circumstances economic equilibrium exists, and on this basis explore the concepts of so-called efficiency equilibrium, existence and uniqueness. The basic issues involve how to ensure the efficiency of economic activities and how to balance efficiency and fairness in the process of resource allocation.
Although each equilibrium may be effective, the insight this theory gives us is that the role of the market itself is not the only determining factor. The external environment, policy orientation and market diversity may all affect the overall economic situation. . As financial markets become increasingly complex, where will future general equilibrium research tasks be carried out?