Page 383 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Figure 26.7 represents multiple equilibriums when it is drawn in basis of excess demand of Fig. 26.4. The
curve E cuts the concave price axis on P , P and P points which describe the multiple equilibriums.
D
1
2
3
The slope of E curve is positive on point P and P while both equilibrium conditions are unique and
3
1
D
fixed. But the slope of E curve is positive in point P which represents variable but unique equilibrium.
2
D
To take the above analysis and uniqueness of equilibrium can rise until general equilibrium with
relation of production and market and its dependencies.
The quantity of demand and supply on price is called equilibrium quantity.

26.2 The Walrasian General Equilibrium Model

The French economist Leon Walras was the first who proposed a model of general equilibrium in his
book Elements of Pure Economics in 1874. Walras has proposed that in every market, all the prices and
quantities determines by affecting each other. Walras was used a system of equations for describing
the functions of buyers in markets and told that the price of every related products and factors can be
determine with this model.

Its Assumptions

The Walrasian General Equilibrium Model is based on these following assumptions—
1. The product and factor are in perfect competition in market.
2. The interest of consumer is given and fixed.
3. There is no joint product.
4. There is no development.
5. There is no investment or disinvestment.
6. Factor of scale is fixed.
7. All units of a factor’s service are equal.
8. The factors of production are in motion.
9. There is full employment.
10. There are no externalities in consumption or production.
11. Every product is substitute of each other.

The Walrasian System or Model

If above assumptions are given, Walras has proposed a system by differentiating the correlate
product market and factor service market. In product market, consumer buys products which are
supplied by firms and they sell their services to the firms. Thus, the firms sell their product to
consumer and buy factor services from consumers. Thus, there is a set of correlate dependencies of
firms and consumers. The unknown variable in this system is the price and products of all services
and products.
To describe the Walrasian Model, we are using the same sign—

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