General equilibrium analysis is named after the

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Unformatted text preview: my at the Universite de Lausanne (Switzerland) in 1870 and remained there until his death in 1910. He pioneered the analysis of multiple markets in a general equilibrium framework and is considered one of the top five greatest economists of all time (Adam Smith, John Maynard Keynes, Leon Walras, and arguments still rage about who fills the four and five spots). The basic objective of general equilibrium theory is to analyze the economy as a whole with everything being fully accounted for. Thus, all components of the economy must be considered in the analysis. For example, in a simple economy, there are three basic components: [1] Consumers make buying decisions on goods according to their individual rational behaviour. This results in a "consumer equilibrium" for each and every individual consumer. Y Consumer Equilibrium IC BL X 80 [2] Producers make buying decisions on capital and labour according to their individual rational behavior. This results in a "producer equilibrium" for each and every individual producer. L Producer Equilibrium IQ Isocost K [3] Markets balance between quantities demanded and quantities supplied for each good and factor input. This results in a "market equilibrium" for each and every individual market. P S Market Equilibrium D Q General equilibrium theory studies the interdependence among these three basic components of the economy. We will look at the notion of general equilibrium at the individual level (i.e. consumer and producer equilibrium) and at the aggregate level (i.e. market equilibrium). So, how do we go from individual levels to aggregate levels? 81 The process of going from individual levels to aggregate levels is called aggregation or summation. We will use the technique called horizontal summation in order to aggregate the various individual levels to market levels. This process is called horizontal summation because we fix the common independent variable at some level on the vertical axis and then add all of the individual dependent variable...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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