General Equilibrium
Hello Mumbai University TYBA IDOL students! Today, we’re diving into the world of Advanced Microeconomics, specifically focusing on “General Equilibrium”. We’re here to demystify this concept and make sure that each one of you walks away with a clear understanding.
General Equilibrium isn’t just a term; it’s a key to unraveling how various economic elements work together in a system. In simpler terms, it’s like solving a complex puzzle where every piece is interconnected, influencing the others.
Whether you’re new to the subject or looking to deepen your understanding, our aim is to break down these intricate ideas into easily understandable language. By the end of this session, you’ll have a solid grasp of what General Equilibrium is and why it’s crucial in the world of Advanced Microeconomics.
So, Mumbai University TYBA IDOL students, get ready to learn about –“General Equilibrium” with customized idol notes just for you. Let’s jump into this exploration together.
QUESTION 1:- Define and explain the concept of generale quilibrium
Introduction:
General equilibrium in economics is like looking at the big picture of how an entire economy works. It’s about understanding how all the different parts fit together to make things run smoothly. Instead of focusing on just a few things, we consider everything – prices, what people want to buy, what businesses want to sell, and more. It’s like making sure all the pieces of the puzzle fit perfectly.
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Connected Pieces:
- General equilibrium is like a big puzzle where every piece is connected. It’s not just about prices; it’s about how much people want to buy and how much businesses want to sell. Everything works together, like ingredients in a recipe.
- In contrast to partial equilibrium, which looks at just one part of the puzzle, general equilibrium sees the whole picture. It’s like zooming out to understand how changes in one area affect everything else.
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Leon Walras’ Idea:
- Leon Walras, an economist, compared markets to a dance. He said that for each thing we buy, the amount people want should match what businesses want to sell at a certain price. It’s like making sure everyone’s dance moves match in the market.
- If there’s an imbalance – like too many people wanting something or too much being produced – prices and quantities adjust until things are balanced again.
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Adjustments and Equilibrium:
- Imagine the economy as a seesaw. If more people want something, the demand side goes down, and the price goes up. This affects how much businesses want to sell, and they might produce more. It’s a back-and-forth until a new balance, a new equilibrium, is found.
- General equilibrium is about making sure the seesaw is steady. It’s not just about prices going up or down; it’s about finding the right balance so everyone is happy.
Conclusion:
In the end, general equilibrium is like having a complete map of the economic world. It helps us see how changes in one part affect the entire system. Thanks to Leon Walras, we know that for the economy to work well, all markets need to be in harmony – like a perfectly orchestrated symphony. It’s not just about prices and quantities; it’s about everyone dancing together in the economic dance to keep things in tune. So, the next time you hear about general equilibrium, think of it as making sure all the puzzle pieces fit and everyone is happy in the big economic picture.QUESTION 2 :- Explain the Walrasiane quilibrium in production and exchange
Introduction:
The Walrasian general equilibrium model, created by the French economist Leon Walras, is like a super detailed map for understanding how everything fits together in an economy. It’s like looking at a giant puzzle where every piece, from prices to the stuff we buy and sell, is connected. Walras used a bunch of equations to explain how everyone, from regular folks to businesses, figures out what to do in a way that makes everything balanced.
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Simultaneous Equilibrium in Everything:
- Imagine figuring out the prices and quantities of everything at the same time – that’s what the Walrasian model does. It looks at how prices and amounts are decided in every market, whether you’re talking about buying a snack or making a big business deal.
- Walras used special equations to show how people who want to sell stuff and people who want to buy stuff work together. It’s like everyone is talking and figuring things out all at once to reach a balanced state.
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Decisions for Everyone:
- In this model, every person or business is like a character in a story. Each of them has their own set of rules (equations) that show how they decide what to buy or sell and how they make things.
- For regular folks, it’s about what they want to buy and what they can offer. For businesses, it’s about what they need to make things and how they produce goods.
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Key Feature: Simultaneous Decisions:
- The special thing about the Walrasian model is that it figures out both prices and quantities at the same time. It’s like having a conversation where everyone’s opinions matter, and decisions are made collectively.
- Imagine you and your friends trying to pick a movie and decide on a pizza topping at the same time – that’s a bit like how this model works.
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Assumptions Simplified:
- There are some fancy assumptions (like perfect competition and constant preferences) that make the model work. Think of them as rules that help simplify things so we can understand how the economy works.
- These assumptions include things like everyone having a job, markets being super fair, and everyone liking the same things all the time. It’s like imagining a perfect world to make the math easier.
Conclusion:
So, the Walrasian general equilibrium model is like having a superhero tool to understand how prices and quantities are set in an economy. It’s a bit like everyone in the economy is having a big conversation, making decisions together to keep things balanced. Thanks to this model, we can see how everyone, from your neighbor buying groceries to big companies producing goods, plays a role in keeping the economic puzzle in harmony. It’s like having a cheat code for understanding the complex dance of buying and selling in the big world of economics.
Important Note for Students:- These questions are crucial for your preparation, offering insights into exam patterns. Yet, remember to explore beyond for a comprehensive understanding.