Lesson preview · General Equilibrium
From Partial to General Equilibrium
~5 min · Free to read
Moving from partial to general equilibrium requires a conceptual leap. Instead of holding “other things equal,” we let everything adjust. Leon Walras formalized this: a general equilibrium is a set of prices such that every market clears simultaneously. This is called Walrasian equilibrium.
Key Term
Walras' Law
Walras’ Law states that if all markets but one are in equilibrium, the last market must also be in equilibrium. In an economy with n markets, you only need n-1 equilibrium conditions — the nth is automatically satisfied. This is because every purchase is also a sale: the total value of excess demands across all markets must sum to zero.
Walras’ Law: the total value of excess demand across all markets sums to zero
Walras’ Law has a powerful implication: if you observe equilibrium in every market except one, the last market must also clear. Every dollar spent in one market comes from income earned in another. The circular flow of income guarantees that excess demand in one market is matched by excess supply elsewhere.
Worked Example
An economy has 3 goods. At current prices, Good 1 has excess demand of 50 dollars, Good 2 has excess supply of 30 dollars. What is the excess demand for Good 3?
Check yourself · no marks
Why does general equilibrium analysis only need n-1 independent equations for n markets?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
Walras’ Law states that:
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