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Unit-2: The Concept of Equilibrium

expertise and hence the social welfare is also maximum. Thus, it helps to understand the basics of Notes
any economical structure.
2. To understand the working of economic system: This theory is different from other theories and if
we remove some unreal recognition, then can understand a picture of an economical process. We can
understand that economy is working fine or not. By this analysis, we can study the non-equilibrium
problems and their resolving.
3. To understand the complex problems of the market: Again, general equilibrium analysis helps to
tell the result of any autonomous economical incident. Let’s assume, the demand of product A has
increased and hence the price can increase. Thus, the demand of parallel products becomes lesser and
this makes the product A costlier. By this, the demand of A can become less. If producer increases
the price of A then it more affects the demand of A. Thus, this general equilibrium analysis helps to
understand the complex market behaviour.
4. To understand the working of pricing process: The general equilibrium analysis helps to understand
the process of pricing in economy. The primary price always changes, so can take decision against
a whole economy – which product should make; how product should make; and who will be the
consumer of this product. Personal consumer and producer take this decision because the product
which they buy or make has a value and this reacts if the demand and supply changed. Thus the
general equilibrium analysis helps to conjugate many personal decisions which affects pricing.

5. To understand the input output analysis: The general equilibrium helps to base the input output
analysis which is developed by Leontiff. In this analysis, which is the base of general equilibrium
analysis, can help to study the behaviour of input output of household and industrial economy.
This analysis is used more to make plans of backward countries and regions.

2.8 Summary

• The general equilibrium is a vast study of economical changes and its relation as well as dependencies
and it helps to understand the process of whole economy. This conjugates the reason and results of
price, quantity of products and changes in services in compare to whole economy. An economy can
only be in general equilibrium state when all the consumers, firms and industries are in equilibrium
state and the product and factor relates to each other. As Stinger said, “The theory of general
equilibrium co-relates each other with all economical process.”
• When all prices are same, then it is in general equilibrium; all consumers get maximum satisfaction
with their earnings; all firms or all industries get equal in profits and production; and in the equal
price, the demand and supply should equal. In the words of Prof. Leftwich, “The general equilibrium
happens for an economy when all the industries get its partial equilibrium state.”

2.9 Keywords

· Equilibrium: Equal on weight
· Partial equilibrium: Limited equilibrium
· Neutral Equilibrium: Fixed economy

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