Question

Write a short note on the following:

General equilibrium

Answer 1

General equilibrium refers to a position in which all units of an economy are in equilibrium simultaneously. It manifests the interdependence among all economic units, implying that when each part of the economic system is adjusted with the others and there are no maladjustments such as depression or unemployment, the economy is said to be in general equilibrium. This concept contrasts with partial equilibrium, which considers equilibrium in a limited part of the economy.

The theory of general equilibrium explains the equilibrium of the entire economy by considering all markets and economic agents at once. Two notable approaches to general equilibrium are:

1. Leon Walras’s approach, which uses mathematical equations to express the interdependence of economic units through a system of simultaneous equations.
2. Leontief’s input-output analysis, which focuses on the interdependence of industries within the economy.