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Unit-2: The Concept of Equilibrium

Its Merits Notes

The merits of partial equilibrium analysis are as follows—
First, it helps to analyze the price of a product or service. Thus, we can understand the changes of
behaviour of a person, firm or industry.
Second, this is helpful to give result of behaviour and plan of economical market and can analyze the
result of obstruction of state in the market. For example, we can check the production tax, production
profit, etc. in cloth industry.
Third, this is a necessary resource to solve the real problems with centralize the problems by making
small section; it helps to analyze and understand the problems easily.
Last, to understand the general working of economical structure where all parts depend on each
other is the base of partial equilibrium analysis. It is impossible to understand and define the general
equilibrium analysis.

Limitations

But there are some limitations of partial equilibrium analysis. It only covers a unique boundary even
it is a person, firm or industry. If we leave the unreal recognition which separates unique market from
rest of the economy, then the partial equilibrium analysis ends. One economical problem of the market
activates the unstability and this change affects first, second and third types of changes in economy.
The partial equilibrium analysis is not capable to study the all parts of economy and their relation with
each other parts. General equilibrium analysis is important to understand the relations of economical
process.

2.7 General Equilibrium

General equilibrium is the study of economical relations and its dependencies which gives understanding
of economical process. It conjugates the reasons and results of all the prices, quantities of products
and the changes in services. An economy is stable when all consumers, all firms, all industries and all
services are in equilibrium and product and services relates to each other by price. As Stinger said,
“The theory of General Equilibrium is the theory of correlation of all the aspect of an economy.”
General equilibrium happens when all the prices are stable; all consumers buy product with their
maximum satisfaction; all firms of an industry are stable in terms of price and production; and in this
stable pricing the demand and supply is equal. As per Prof. Leftwich, “For a whole economy, the
general equilibrium is based on the partial equilibrium of all the economical processes.”

Its Assumption
The general equilibrium is based on these recognitions:
1. There is the competition in product market and factor market.
2. The likes and interests of a consumer are given and stable.
3. The income of consumer is given and stable.
4. The factors of production are moving in various industries and places.
5. The measurement of result is stable.
6. Every firm runs on equal production cost.
7. All processes are equal for a production unit.

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