Description: General equilibrium is an economic condition where supply and demand are balanced across all markets in an economy. This concept is based on the idea that consumer and producer decisions are interconnected, meaning that a change in one market can affect others. In a state of general equilibrium, all markets reach a point where there are no incentives for economic agents to change their behavior, as prices adjust to equal the quantity demanded and the quantity supplied. This equilibrium can be represented through mathematical models that analyze multiple markets simultaneously, allowing economists to understand how economic policies, changes in technology, or variations in consumer preferences can influence the economy as a whole. The relevance of general equilibrium lies in its ability to provide a holistic view of the economy, helping policymakers anticipate the consequences of their decisions in a broader context. Additionally, this concept is fundamental in welfare theory, as it allows for the evaluation of the efficiency of resource allocations in an economy.
History: The concept of general equilibrium was developed in the 19th century, primarily by economist Léon Walras, who formalized the theory in his work ‘Éléments d’économie politique pure’ published in 1874. Walras introduced a system of equations that described how prices are determined in a system of interrelated multiple markets. Throughout the 20th century, other economists, such as Kenneth Arrow and Gérard Debreu, expanded and formalized the theory, which earned them the Nobel Prize in Economics in 1972. Their work focused on the existence and stability of general equilibrium, establishing the foundations for modern economic analysis.
Uses: General equilibrium is used in various areas of economics, including welfare theory, social welfare economics, and economic policy analysis. General equilibrium models are valuable tools for assessing the impact of changes in fiscal policies, regulations, and other economic factors on the overall welfare of society. They are also applied in evaluating the effects of external shocks, such as financial crises or changes in technology, on the economy as a whole.
Examples: A practical example of general equilibrium can be observed in the analysis of a carbon tax. When implementing this tax, it is expected that fossil fuel prices will rise, which in turn may affect energy demand, the production of goods and services, and prices in other markets. General equilibrium models allow economists to simulate these interrelated effects and assess the overall impact of the policy on the economy. Another example is the use of general equilibrium models in evaluating trade agreements, where tariffs and quotas are analyzed for their effects on multiple sectors and markets simultaneously.
