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Monday, April 3, 2017

Theory of General Equilibrium-Price and Goods Changes

The Theory of General Equilibrium developed by Leon Walras offers a solid example of how changes in one part of a system impacts the other elements within the system. According to the theory, each time something is changed (i.e. prices of finished good) then all the other factors change. The work was first published in 1874 in Elements of Pure Economics.

The theory is not perfect and doesn't calculate well but did highlight a system at play that could possible be calculated to determine where equilibrium would be achieved. In real life, there are many more factors, lack of information transference, and regional differences. His elements were:

1.) The prices of all the finished goods.
2.) The prices of all different factors of production.
3.) The quantities of finished goods demanded.
4.) The quantities of factors of production offered.

As price rises due to cost of production, demand will adjust downward, and less will be produced. It was believed that perfect equilibrium in a marketing system could be found and realized that would benefit many people in terms of cost. However, this equilibrium never actually occurred and therefore the theory was seen as somewhat faulty.

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