Lesson preview · General Equilibrium
Interdependent Markets
~5 min · Free to read
So far, we have analyzed markets in isolation — partial equilibrium analysis. We studied the wheat market without worrying about what happens in the corn market. But markets are connected. A shock in one market ripples through others via substitutes, complements, and factor markets. General equilibrium analysis considers all markets simultaneously.
Key Term
Partial vs. General Equilibrium
Partial equilibrium: Analyze one market in isolation, holding everything else constant (ceteris paribus). Simple and useful for many questions.
General equilibrium: Analyze all markets simultaneously, accounting for feedback effects between them. Necessary when shocks have large spillovers.
Consider an oil price shock. Partial equilibrium tells us the direct effect: higher gas prices, lower quantity demanded. But general equilibrium reveals the cascade: higher transportation costs raise food prices, consumers shift to public transit (raising bus demand), reduced driving lowers rubber demand, oil-producing regions boom while manufacturing regions suffer. Each adjustment feeds back into other markets.
In general equilibrium, every market clears simultaneously — each quantity demanded depends on ALL prices
Worked Example
A drought destroys 40% of the corn crop. Trace the general equilibrium effects on: (a) corn market, (b) beef market (corn is cattle feed), (c) chicken market (substitute for beef; to keep it simple, ignore the corn in chicken feed).
Check yourself · no marks
When is partial equilibrium analysis sufficient, and when do we need general equilibrium?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
General equilibrium analysis differs from partial equilibrium by:
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