Marshall's Partial Equilibrium Analysis and Walras General Equilibrium Analysis

11/27/2016
Marshall'sPartialEquilibriumAnalysisandWalrasGeneralEquilibriumAnalysis
Marshalls Partial
Equilibrium
Analysis and
Walras General
Equilibrium
Analysis
Articlesharedby
Marshalls Partial Equilibrium Analysis

and Walras General Equilibrium
Analysis!
In regard to pricing under perfect
competition, two main approaches have
been adopted. One approach has been
followed by famous English economist
Alfred Marshall who adopted the partial
equilibrium approach and the second
approach has been adopted up by Walras
and is called general equilibrium approach.
We shall explain below both these
approaches in price theory.
1.MarshallsPartialEquilibrium
Analysis
In partial equilibrium approach to the
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pricing, we seek to explain the price

determination of commodity, keeping the
prices of other commodities constant and
also assuming that the various commodities
are not interdependent.
In explaining partial equilibrium
approach, Marshall writes:
ADVERTISEMENTS:
The forces to be dealt with are, however, so

numerous that it is best to analyse a few at a
time and to work out a number of partial
solutions as auxiliaries to our main study.
Thus we begin by isolating the primary
relations of supply, demand and price in
regard to a particular commodity. We
reduce to inaction all other forces by the
phrase other things being equal. We do not
suppose that they are inert, but for the time
we ignore their activity. This scientific
device is a great deal older than science; it is
the method by which consciously or
unconsciously sensible men dealt from time
immemorial with every difficult problem of
everyday life.
Thus in Marshallian explanation of pricing
under perfect competition, demand function
for a commodity is drawn with the
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assumption that prices of other

commodities, tastes and incomes of the
consumers remain constant. Similarly,
supply curve of commodity is constructed
by assuming that prices of other
commodities, prices of resources or factors
and production function remain the same.
Then Marshalls partial equilibrium analysis
seeks to explain the price determination of a
single commodity through the intersection
of demand and supply curves, with prices of
other goods, resource prices etc., remaining
the same. Prices of other goods, resource
prices, incomes, etc., are the data of the
system which are taken as given to explain
the determination of price-output equilibrium of a single commodity.
Given the assumption of ceteris paribus it
explains the determination of a price of a
goods, say X, independently of the prices of
all other goods. With the change in the data,
new demand and supply curves will be
formed and, corresponding to these, new
price of the commodity will be determined.
ADVERTISEMENTS:
Thus partial equilibrium analysis of price

determination also studies how the
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equilibrium price changes as a result of

change in the data. But given the
independent data the partial equilibrium
analysis explains only the price
determination of a commodity in isolation
and does not analyse how the prices of
various goods are interdependent and interrelated and how they are simultaneously
determined.
It should be noted that partial equilibrium
analysis is based on the assumption that the
changes in a single sector do not
significantly affect the rest of the sectors.
Thus, in partial equilibrium analysis, if the
price of a good changes, it will not affect the
demand for other goods.
Prof. Lipsey rightly writes: All partial
equilibrium analyses are based on the
assumption of ceteris paribus. Strictly
interpreted, the assumption is that all other
things in the economy are unaffected by any
changes in the sector under consideration
(say sector A). This assumption is always
violated to some extent, for anything that
happens in one sector must cause changes
in some other sectors. What matters is that
the changes induced throughout the rest of
the economy are sufficiently small and
diffuse so that the effect they in turn have
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on the sector A can be safely ignored.
2.WalrasGeneralEquilibrium
Analysis:
In general equilibrium analysis, put forward
by French Economist Walras the price of a
good is not explained to be determined
independently of the prices of other goods.
Since the changes in price of good X affect
the prices and quantities demanded of other
goods and in turn the changes in prices and
quantities of other goods will affect the
quantity demanded of the good X, the
general equilibrium approach explains the
simultaneous determination of prices of all
goods and factors.
ADVERTISEMENTS:
As stated above, partial equilibrium

approach assumes that the effect of the
change in price of a good A will be so
diffused in the rest of the economy (i.e., over
all other goods) so as to have negligible
effect on the prices and quantities of other
individual goods.
Therefore, where the effect of a change in
the price of a good on the prices and
quantities of some other goods is significant,
as is there in the case of inter-related goods,
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that is, substitutes and complementary

goods, the partial equilibrium approach
cannot be validly applied in such cases and
therefore there is need for applying general
equilibrium analysis which should explain
the mutual and simultaneous determination
of their prices and quantities.
General equilibrium analysis deals with
inter-relationship and inter-dependence
between equilibrium adjustments with each
other. General equilibrium exists when at
the going prices, the quantities demanded of
each product and each factor are equal to
their respective quantities supplied.
A change in the demand or supply of any
good, or factor would cause changes in
prices and quantities of all other goods and
factors and there will begin the process of
adjustment and readjustment in demand,
supply and prices of other goods and factors
till the new general equilibrium is
established. Indeed, the general equilibrium
analysis is solving a system of simultaneous
equations.
ADVERTISEMENTS:
In a general equilibrium system, the

quantity demanded of each good is
described by an equation in which its
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quantity demanded is a function of prices of

all goods. Likewise, in general equilibrium
analysis, quantity supplied of each good is
considered to be the function of price of all
factors of production.
In a general equilibrium system the prices
of all goods affect the quantity demanded of
each good. Further, the prices of the all
factors affect the quantity supplied of each
good. Besides these crucial equations, there
will be equations determining the price of
each of the factors of production. As noted
above, a change in any of the demand or
supply equations would cause changes in all
prices and quantities and as a result the
system will tend to move to the new general
equilibrium.
To explain the inter-relationship and
interdependence among the prices and
quantities of goods and factors and
ultimately to explain the determination of
the relative prices of all goods and factors,
the proportion in which different goods are
being produced and different factors are
being used for the production of different
goods is the essence of general equilibrium
analysis.
However, in this book we shall mainly
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confine ourselves to the partial equilibrium

approach to the determination of relative
prices. In a separate part of this book we
shall explain the general equilibrium analysis using Edge-worth Box diagram.
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11/27/2016