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WHAT IS GENERAL EQUILIBRIUM | SIGNIFICANCE OF EQUILIBRIUM CONCEPT

General Equilibrium

What is General Equilibrium? In examining the adjustment process in a single industry we have taken no account of the complex interrelationships among the industries of a modern economy. Obviously, actions taken in industry A are influenced by and have an influence on actions taken in industry B, industry C, and so on. No one industry can reach final long-run equilibrium until all have reached long-run equilibrium. When each firm and each industry has reached this position, and when each individual is also in equilibrium as a consumer and as a resource owner, the economy as a whole is in general equilibrium. 

SIGNIFICANCE OF EQUILIBRIUM CONCEPT

The equilibrium concept provides the economist with a description of the tendencies at work in a market economy. The word “tendencies” are used in recognition of the fact that the conditions necessary for an economy actually to reach and remain at the general equilibrium position are; Never realized in full in economic life. Those conditions are:

  • Pure competition in all markets;
  • No changes in consumer demands;
  • No changes in population;
  • No changes in technology;
  • No changes in the general level of prices;
  • No disturbances from the actions of government; and
  • No disturbances from other economies.

Given these seven conditions, the economic units of the country could work out their interrelated adjustments and arrive eventually at a position of general equilibrium. Obviously, not even one of these conditions is likely to be completely realized at a given moment of time. For example, neither consumer demands nor technology “stand still” for any length of time in a dynamic society such as ours. Before an industry has adjusted to one demand and technology pattern, it finds that it must change its course to meet the requirements of a new pattern. In real life, the industry dog never catches the equilibrium hare. However, the equilibrium analysis provides the economist with a description of the chase. The dogs in a race never catch the mechanical hare; however, the behavior of the dogs can be understood only by knowing why they are trying to catch the hare and how. The behavior of the firms, consumers, and resource owners in a market economy can be understood only by knowing why and how they are trying to catch what. It is this kind of knowledge which the economist gains through his study of equilibrium.

THE PATTERN OF THE ANALYSIS TO FOLLOW

The next step we shall take will be to examine the distribution of rewards in a market economy under the same demanding conditions as those imposed on the analysis. Then we shall relax those conditions, one by one, to determine how a market economy functions in the imperfect and changing world of reality, and to discover how (and if) we must modify the conclusions that logically follow from this analysis.

First, we shall drop the assumption of universal and pure competition and examine the performance of markets under conditions that are not purely competitive.

Next, we shall allow for the fact that economic processes are carried on in a large number of politically independent but economically interdependent societies in which populations are growing at very different rates, in which technologies are at very different levels, and in which social attitudes toward change are very different.

We shall take account of the fact that governments do intervene in economic life in a wide variety of ways, some helpful to the performance of an enterprise economy and others not so helpful or positively detrimental.

Thereafter we shall study the complications that arise out of the use of money, both at the national and international levels, with particular reference to the problems of inflation and deflation, of prosperity and depression. This will be followed by an analysis of selected problems in economic life, largely to illustrate the way in which the tools of the economist can be used to outline the issues in economic policy.

Finally, we shall examine alternatives to the enterprise system, with a view to discovering how well each of the alternative systems may be expected to serve the ends of a liberal, democratic society.

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