Page 25 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 8. There is no change in production technique.
9. The labour and other resources are fully working.

Working of the General Equilibrium System

As per above recognition, the economy is in equilibrium stage when every product and service meets
the demand. It means there is uniformity in the decision of the all participants of the market. The
decision of consumer to buy every product should equal to the production and selling of that product.
Thus, the decisions to sell every service should equal to their labours. When sellers’ thinking is equal to
the buyers decision then General Equilibrium happens.
In an economy, if the likes and the interest are given for the consumers, the quantity of every product
does not depend on its price but also depends on other product pricing. Thus every consumer gets full
satisfaction against all the products. For him, every product is equally valuable on its price.

Give your opinion in regards to General Equilibrium.

In this analysis, it is assumed that every consumer spends his whole income in products, so his
expenditure is equal to his income and in respect to his income, it depends that how he expends. On
the other hand, the consumer gets income by selling his own products. Thus, the demand of various
products depends on their pricing as well as their service.
Now we take supply part. If we have the production status, the shape of market and the ambition of
firm, then the cost of the product depends on its production cost. If we assume that the measurement
of different products of different production firms are stable then the producer will produce the
product on its minimum average making cost. The product and market relation is figured out in
Fig. 2.5. Market is in stable stage on pointer E where the demand and supply lines intersect each
other. Here the OP is pricing of product on which OQ product quantity sells and buys in the
M
market. In the equal cost, all firms produce and sell the product on price OP. When pointer B has
MC = MR and AC = AR on point E , then firm produces and sells the quantity OQ then it is in
1
the equilibrium state. Let’s assume that there are 100 firms in the market and produce 60 types of
products then the total product count will 6000 (100 × 60) units. This analysis can be used on other
products in economy.

Fig. 2.5

( A ) ( B )

S E MC
AC
Price P E Revenue and Cost P 1 AR = MR

D
O
Q O Q
M
Quantity Quantity

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