Page 385 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 2. The average cost of production is equal to the price of m product—

a p + a p + a p + …. = 1
t t p p q q
b p + b p + b p + …. = p
t t p p q q b
Thus the equation is 2m + 2n. No equation is independent because the budget equation needs to be equal
for every human to satisfy this equation. We have left with 2m + 2n — 1 independent equation and this is
equal to the number of unknown of determined-(1) n quantity of supplied factor services; (2) m quantity
of demanded products; (3) n price of services and (4) m – 1 price of product because p = 1 is described.
a
Since the number of independent equations is equal to number of unknowns, so the Walrasian General
Equilibrium model is fixed. But the equalization of number of independent equations and number of
unknowns is not an essential condition for solution of model. This is not uniqueness and not an essential
condition. This is because the Walrasian system is does not include the negative price of factor services
and products and negative quantity of products and factors. In this model, we cannot determine
absolute prices. So, the Walrasian Model is not determined because no equation is independent from
equations which assume that there is low equations than low unknown as p = 1.
a
Walras has solved the problems of determination of general and fixed equation by using tatonnement
and groping. Suppose that all sellers and buyers disclose the quantity which they want to sell or buy
on prices. The business is an auction in perfect competitive markets. The auction man auctions the
product and businessman tells the price. But the price and agreement are not happens until a set of
equilibrium prices does not reach. If the demand is high for a set of any products then auction man
increases the price of that particular product and lower the price if supplies more. They make this type
of announcement until they do not reach in a price which makes equilibrium in general market. To sell
and buy the production services, Walras has proposed that producer gives “tickets” by which they
can buy a given quantity of services. These “tickets” tie temporarily to the producers and sellers. Only
the price of all systems will come in equilibrium when the agreed price should be matched with equal
demand and supply of services. Thus the Walrasian Model represents the determination of general
market equilibrium and how it fixes.
Its Criticism—There are some limitations in Walrasian General Equilibrium along with determination
problem.
First, it is based on many real conditions which are unreal in world. The perfect competition, which is
based on this concept, never happens.
Second, this model is fixed. In this model, every producer and consumer, without wasting any time,
consumes and produces fixed products. Their interests, preferences and economical decision are similar
to each other. In fact, it never happens. The producer and consumer never think in a similar way and
never work accordingly. The preferences and interests are always changed. The factors of scale never
fixed and no two factors are equal. Thus the production cost of every producer is different. Since the
condition, given by Walras has always changed, so the movement towards general equilibrium stops
and nobody can achieve it.
Last, we cannot remove many concepts because the model of Walras is set of simultaneous equations
which end in lack of those concepts. Thus this model starts with the base of equations which make it
difficult. So the usefulness of this concept ends for normal student of economics.

Self Assessment

State whether the following statements are True/False:
7. Diagrammatically, excess demand is shown by excess curve.
8. The French economist Leon Walras was the first who proposed a model of general equilibrium in
his book Elements of Pure Economics in 1874.

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