14.2 : General Equilibrium Analysis

General equilibrium analysis is a fundamental concept in economics. It examines how supply and demand interact simultaneously across multiple markets. These interactions help determine prices and allocate resources efficiently. Unlike partial equilibrium, which focuses on a single market in isolation, general equilibrium considers the interdependence between markets, acknowledging that changes in one market can ripple through the entire economy.

Process of General Equilibrium
General equilibrium is typically analyzed through mathematical models, such as the Walrasian model, which uses equations to represent the behavior of consumers, firms, and markets. In this analysis, initial conditions, such as resource endowments and available technology, which set the foundation for market interactions, are first identified. Next, simultaneous equations that represent supply and demand across interconnected markets are solved. This process helps determine equilibrium prices and quantities, ensuring that all markets are clear. Finally, the influence of external factors, such as technological advancements or policy changes, on equilibrium is examined. Understanding these effects provides insights into market stability and efficiency.

Applications
General equilibrium analysis evaluates the broader economic impact of policies like taxes and trade tariffs. It also helps understand changes in income distribution, welfare, and the effects of technological advancements or resource scarcity.

Example: Consider a subsidy on renewable energy. General equilibrium analysis would assess its effects on the energy market and related markets. For example, the subsidy may increase demand for labor in renewable sectors, reduce the demand for fossil fuels, and affect the prices of materials used in energy production.

This comprehensive approach provides valuable insights into the broader economic implications of individual market changes.