General equilibrium theory is a branch of theoretical economics. It seeks to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium, hence general equilibrium, in contrast to partial equilibrium, which only analyzes single markets. As with all models, this is an abstraction from a real economy; it is proposed as being a useful model, both by considering equilibrium prices as long-term prices and by considering actual prices as deviations from equilibrium.
General equilibrium theory both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold. The theory dates to the 1870s, particularly the work of French economist Léon Walras in his pioneering 1874 work Elements of Pure Economics.
Read more about General Equilibrium Theory: Overview, Modern Concept of General Equilibrium in Economics, Properties and Characterization of General Equilibrium, Unresolved Problems in General Equilibrium, Computing General Equilibrium, Other Schools
Famous quotes containing the words general, equilibrium and/or theory:
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—Sun Tzu (6th–5th century B.C.)
“When a person hasn’t in him that which is higher and stronger than all external influences, it is enough for him to catch a good cold in order to lose his equilibrium and begin to see an owl in every bird, to hear a dog’s bark in every sound.”
—Anton Pavlovich Chekhov (1860–1904)
“Won’t this whole instinct matter bear revision?
Won’t almost any theory bear revision?
To err is human, not to, animal.”
—Robert Frost (1874–1963)