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In most simple microeconomic stories of supply and demand a static equilibrium is observed in a market; however, economic equilibrium can be also dynamic. Equilibrium may also be economy-wide or general, as opposed to the partial equilibrium of a single market. Equilibrium can change if there is a change in demand or supply conditions.
Partial equilibrium, as the name suggests, takes into consideration only a part of the market to attain equilibrium. Jain proposes (attributed to George Stigler ): "A partial equilibrium is one which is based on only a restricted range of data, a standard example is price of a single product, the prices of all other products being held fixed ...
Market equilibrium computation is interesting due to the fact that a competitive equilibrium is always Pareto efficient. The special case of a Fisher market, in which all buyers have equal incomes, is particularly interesting, since in this setting a competitive equilibrium is also envy-free. Therefore, market equilibrium computation is a way ...
The conceptual framework of equilibrium in a market economy was developed by Léon Walras [7] and further extended by Vilfredo Pareto. [8] It was examined with close attention to generality and rigour by twentieth century mathematical economists including Abraham Wald, [9] Paul Samuelson, [10] Kenneth Arrow and Gérard Debreu. [11]
This is a corner solution as the highest possible IC (IC 2) intersects the budget line at one of the intercepts (x-intercept). [1] In mathematics and economics, a corner solution is a special solution to an agent's maximization problem in which the quantity of one of the arguments in the maximized function is zero. In non-technical terms, a ...
In the examples above, a competitive equilibrium existed when the items were substitutes but not when the items were complements. This is not a coincidence. Given a utility function on two goods X and Y, say that the goods are weakly gross-substitute (GS) if they are either independent goods or gross substitute goods, but not complementary goods.
The concept of an excess demand function is important in general equilibrium theories, because it acts as a signal for the market to adjust prices. [13] If the value of the excess demand function is positive, then more units of a commodity are being demanded than can be supplied; there is a shortage .
so present consumption is a function of past income (with c as the marginal propensity to consume). Here, t is the tax rate and m is the ratio of imports to GDP. Investment, in turn, is assumed to be composed of three parts: = + + ()