The question about how the different economic units such as consumers, governments, and enterprises operate in a competitive markets und make the decisions under conditions of limited amounts of resources is a main subject of studies of the economic science. The lack of resources has turned into a vexed problem in recent years, while people’s desires keep increasing.
In order to deal with such a conflict, these three basic questions should be answered by economic systems: What services and goods should be produced and in what quantities? How should these services and goods be produced? Who would be the end customers of such services und goods and how should these should be distributed? Microeconomic theory defines and models an economic activity as an interaction of individuals (economic agents) pursuing their private interests.
Considering different microeconomic processes for better understanding the principles of the whole economy we are interested in how the goods are distributed among consumers within different markets. What condition markets’ outcomes, i.e. prices of goods and services and quantities traded, are agents’ behavioral characteristics and the market mechanisms, described of law of supply and demand. It is common to divide two large and groups of agents - households and firms, each of them plays its own role in the market.
Table of Contents
- Prologue
- Part I. General Equilibrium in a Pure Exchange Economy
- 1.1. Positive Analysis
- 1.1.1 Pure Exchange Economy
- 1.1.2. Walras' Law and the Walrasian Equilibrium: Definitions
- 1.1.3 Existence of Walrasian Equilibrium
- 1.1.4 Uniqueness of Walrasian Equilibrium
- 1.1.5 Stability of Walrasian Equilibrium
- 1.2. Normative Analysis: Welfare Economics
- 1.2.1 The First Fundamental Theorem of Welfare Economics and Its Implication
- 1.2.2 The Second Fundamental Theorem of Welfare Economics and Its Implication
- Part II: General Equilibrium with Production
- 2.1. Positive Analysis: Walrasian Equilibrium with Production
- 2.2. Welfare Economics
- Conclusions
Objectives and Key Themes
This essay examines competitive market economies through the lens of general equilibrium theory, specifically focusing on Leon Walras' interpretation. It analyzes both the positive and normative aspects of general equilibrium, exploring the relationship between competitive equilibrium and Pareto efficiency. The study also investigates the fundamental theorems of welfare economics within the context of general equilibrium analysis.
- General Equilibrium Theory and its Walrasian Interpretation
- Positive and Normative Properties of General Equilibrium
- Competitive Equilibrium and Pareto Efficiency
- Fundamental Theorems of Welfare Economics
- Pure Exchange Economies and the Edgeworth Box
Chapter Summaries
Part I. General Equilibrium in a Pure Exchange Economy: This section delves into the core principles of general equilibrium within a pure exchange economy. It begins by defining the positive analysis of general equilibrium, clarifying its role in determining equilibrium prices and quantities in perfectly competitive markets. The concept of a pure exchange economy is introduced, focusing on a scenario where consumers have fixed endowments of goods and engage in trade. The use of the Edgeworth box as a graphical tool to analyze the exchange of two goods between two individuals is explained in detail, illustrating the feasible allocation of resources and demonstrating the concept of Pareto efficiency within this simple model. The section also establishes a foundation for understanding Walras' Law and the definition of Walrasian Equilibrium. This lays the groundwork for the later discussion of normative aspects and welfare economics within this theoretical framework.
1.1. Positive Analysis: This chapter provides a detailed examination of the positive aspects of general equilibrium theory. It presents the pure exchange economy as a specific case study, illustrating how consumers with fixed endowments interact to trade goods, considering their respective preferences. The chapter utilizes the Edgeworth box to graphically represent these interactions and possibilities, allowing for a visual understanding of feasible allocations and potential equilibrium points. This section sets the stage for the later analysis by providing a solid foundation for understanding equilibrium within a system of perfectly competitive markets and the implications of agents’ actions and preferences on market outcomes.
1.2. Normative Analysis: Welfare Economics: This chapter shifts from positive analysis to normative considerations, focusing on welfare economics within the context of general equilibrium. It explores the implications of the First and Second Fundamental Theorems of Welfare Economics. These theorems provide insights into the relationship between competitive equilibrium and Pareto efficiency, offering a framework for evaluating the allocative efficiency of market outcomes. By examining these theorems, the chapter critically analyzes the conditions under which market mechanisms can lead to optimal resource allocation and explores potential welfare implications of deviations from these conditions.
Part II: General Equilibrium with Production: This part of the essay extends the analysis of general equilibrium to incorporate production, adding a new layer of complexity to the model. It builds upon the foundation laid in Part I by introducing production activities as additional elements within the overall economic system. This section will likely explore how firms' production decisions influence market equilibrium, considering the interplay between supply and demand and how the allocation of resources evolves when production is included. This will likely involve extending the concept of Pareto efficiency and welfare implications to this more complex scenario.
Keywords
General equilibrium theory, Walrasian equilibrium, Pareto efficiency, welfare economics, pure exchange economy, Edgeworth box, competitive markets, resource allocation, positive analysis, normative analysis, production.
Frequently Asked Questions: A Comprehensive Language Preview of General Equilibrium Theory
What is the purpose of this essay?
This essay examines competitive market economies using general equilibrium theory, particularly Leon Walras' interpretation. It analyzes both the positive (how the economy works) and normative (how the economy *should* work) aspects, exploring the link between competitive equilibrium and Pareto efficiency (a state where no one can be made better off without making someone else worse off). It also investigates the fundamental theorems of welfare economics within this context.
What are the key themes explored in this essay?
The main themes include general equilibrium theory and its Walrasian interpretation; positive and normative properties of general equilibrium; the relationship between competitive equilibrium and Pareto efficiency; the fundamental theorems of welfare economics; and pure exchange economies (economies where only trading occurs, no production) and the Edgeworth box (a graphical tool to analyze these exchanges).
What is covered in Part I: General Equilibrium in a Pure Exchange Economy?
This section lays the groundwork by defining general equilibrium in a pure exchange economy (an economy with only trading, no production). It explains positive analysis (determining equilibrium prices and quantities), introduces the pure exchange economy concept and the Edgeworth box (a graphical representation of resource allocation and Pareto efficiency), and defines Walras' Law and Walrasian Equilibrium.
What does the Positive Analysis (Chapter 1.1) cover?
Chapter 1.1 provides a detailed look at the positive aspects of general equilibrium theory using the pure exchange economy as an example. It shows how consumers with fixed resources trade goods based on their preferences, using the Edgeworth box to visualize interactions and possible equilibrium points. This establishes a foundation for understanding equilibrium in perfectly competitive markets.
What does the Normative Analysis: Welfare Economics (Chapter 1.2) cover?
Chapter 1.2 shifts to normative analysis (evaluating the desirability of outcomes), exploring welfare economics within general equilibrium. It examines the First and Second Fundamental Theorems of Welfare Economics, explaining their implications for the relationship between competitive equilibrium and Pareto efficiency and how well markets allocate resources.
What is covered in Part II: General Equilibrium with Production?
Part II extends the analysis to include production, adding complexity to the model. It builds on Part I by incorporating firms' production decisions into the system, exploring how these decisions influence market equilibrium, resource allocation, and Pareto efficiency.
What are the key concepts and terms used throughout the essay?
Key terms include general equilibrium theory, Walrasian equilibrium, Pareto efficiency, welfare economics, pure exchange economy, Edgeworth box, competitive markets, resource allocation, positive analysis, normative analysis, and production.
What is the structure of the essay's Table of Contents?
The essay begins with a Prologue, followed by Part I (General Equilibrium in a Pure Exchange Economy) which includes sections on Positive and Normative Analysis. Part II (General Equilibrium with Production) then expands the model to incorporate production. The essay concludes with a concluding section.
What is the overall objective of this essay?
The overarching goal is to provide a thorough understanding of general equilibrium theory, its applications, and its implications for understanding market economies and resource allocation. It aims to bridge the gap between positive and normative economics within this framework.
- Quote paper
- Dipl.-Ing. Dipl.-Wirt.Ing. Siamak Hadifar (Author), 2017, The Walrasian General Equilibrium Theory, Munich, GRIN Verlag, https://www.grin.com/document/421918
