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Lecture: 4
Micro Economics
By
Sri Sastri Ram Kachari, Assistant Professor & Head Department of
Economics, Radhamadhab College, Silchar-06
What is equilibrium in Economies ?
 The term ‘equilibrium’ is derived from two Latin words called “acqui” and
“Libra”. “Acqui” means equal and “Libra” refers to balance. Hence,
equilibrium means ‘equal balance’. The term ‘equilibrium’ is substantially used
in physics. In physics, equilibrium refers to a state of balance. An object is
considered to be in a state of equilibrium, when two opposing forces balance
each other on the object under review. The importance of the equilibrium
concept not just limits to physics. The application of the concept of equilibrium
is vital in economics that makes some economists call economics as
equilibrium economics. In economics, equilibrium denotes a state in which the
two opposite forces are unable to influence each other.
Notions of equilibrium
Partial Equilibrium
a single product, the prices of all other products being held fixed during the
analysis.
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.
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.
Partial equilibrium analysis examines the effects of policy action in
creating equilibrium only in that particular sector or market which is directly
affected, ignoring its effect in any other market or industry assuming that
they being small will have little impact if any. Hence this analysis is
considered to be useful in constricted markets.
Leon Walras first formalized the idea of a one-period economic equilibrium
of the general economic system, but it was French economist Antoine
Augustine Cournot and English political economist Alfred Marshall who
developed tractable models to analyze an economic system
General Equilibrium
In economics, general equilibrium theory attempts to explain the behavior
of supply, demand, and prices in a whole economy with several or many
interacting markets, by seeking to prove that a set of prices exists that will result
in an overall (or "general") equilibrium. General equilibrium theory contrasts to
Partial equilibrium, which only analyzes single markets. As with all models,
this is an abstraction from a real economy; it is proposed as being a useful
model, both by considering equilibrium prices as long-term prices and by
considering actual prices as deviations from equilibrium.
General equilibrium theory both studies economies using the model of
equilibrium pricing and seeks to determine in which circumstances the
assumptions of general equilibrium will hold. The theory dates to the 1870s,
particularly the work of French economist Leon Walras in his pioneering
1874 work Elements of Pure Economics.
Distinguish between Partial Equilibrium and
General equilibrium
 Partial equilibrium studies equilibrium of individual firm, consumer, seller and
industry. It studies one variable in isolation keeping all the other variables
constant.
General Equilibrium, studies a number of economic variable, their inter relation
and inter dependencies for understanding the economic system.
Partial equilibrium = study of equilibrium in one market in isolation
General equilibrium = study of equilibrium of all markets simultaneously
Until now, we only looked at one market at a time (partial equilibrium)
exception: increasing-cost industry analysis
But: changes in one market can (and usually do) affect other markets as well
If two goods are .related. (Complements or substitutes), then their markets are
linked Changes to demand/supply in one market affect the equilibrium in linked
markets
Partial equilibrium analysis would not consider all this feedback between
linked markets
Lecture: 5
Development and Environmental Economics
By
Miss Pratiti Singha, Assistant Professor(Part Time), Department of
Economics, Radhamadhab College, Silchar-06