Page 23 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 2.6 Partial Equilibrium

Partial or Special equilibrium analysis which is also called Micro analysis describes the equilibrium
of a person, firm or industry or a group of industry. This is a market process which fixes the price of
products as well as resources’ price and where economists analyse only on one or two points rather
than all. In the words of Stigler, “The partial equilibrium is based on fixed data. One unique example
is an analysation of a product pricing while all other product prices remain stable.” The economics of
Marshall belong maximum to the study of partial equilibrium analysis.
The partial analysis relates to two kinds of problems. One, which relates to unique behaviour of a
person, firm or industrial economy. For example, this analysis limits itself to a product’s market where
we think about the price of product, production technique and the quantity of factors to produce the
product. While all other factors are stable which affect pricing. Second, it only deals in the first order
of result of that economical product it analyses. It does not define the effects of all the products’ pricing
and the effects of this pricing on the unique product pricing which it is studying.
We will study the equilibrium state of an individual, firm or industry in brief.
A consumer is in equilibrium state when he spends his income on various services and products that he
gets maximum satisfaction. The conditions are (1) the marginal consumption of every product is based
MU
MU
____
N

on its price, means _____ A = MU B B = _____ and (2) consumer should expend his all income to buy products,

;

P
P
P
N
A
means Y = P Q + P Q +……+ P Q . It supposes that his interest, use, income and the price of the
N
A
N
A
3
B
products he wants to buy is already given and stable.
A firm is in equilibrium state when it does not want to change in its production. Its marginal revenue
and marginal cost equals in short time and in long time, it qualifies for the full equilibrium terms means
MC = MR = LAC on lowest point. Thus it gets normal profit and does not want to leave the industry. The
production technique and the price of product and factors are given in analyzing the firm.
An industry is in equilibrium stage when every firm gets normal profit and neither any firm wants to
leave nor any firm wants to join this industry. There is always a fixed price of a product in market by which
consumer wants to buy, which is equal to the same amount produced the similar product in different firms.
Every firm or industry sells their product on current market price and fixes those levels of production
where its marginal cost and marginal revenue would be equal. They can decrease its production in short
run but in long run, it is necessary that price is equal to its minimum average cost of production.
A factor of production (Land, Labour, Capital or Organization) is in equilibrium state when it works in
his maximum paid work that his income is maximum. This is the condition when its price is equal to
marginal revenue product. On that price, he does not want to change or do more or less to its service.
Thus, there is only one price for resource which is distributed in all markets. Now, an owner of a
resource is ready to sell his services but it should be equal to that is quantity which industrialist wants.
Assumptions
The partial equilibrium analysis is based on the given pricing of the product. The interest, income, habits
and demand are stable. For firms, the production technique and the price of other related products are
stable. The industry gets the raw material on the stable price. If any change occurs like the interest of
consumer or the production techniques then this stable law would change and the equilibrium stage
comes on a new point. The analysis of market for a product assumes that the price of raw material as
well as the quantity and price of their products are stable. Then the production technique between place
and industries is fully movable. In a short term, a product can get lower profit but in a long term, this
should be equal to its production value for all places.
The analysis of above is related to full competition of market and can be used in monopoly, monopolistic
competition, oligopoly and one-rating market.
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