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Unformatted text preview: e ignoring outside influences. This means that we have been studying the economics of a single situation holding all other things the same (ceteris paribus). On the other hand, general equilibrium analysis considers the economy as a whole with everything being fully accounted for. We use the phrase, "everything depends on everything else" to describe general equilibrium theory. While general equilibrium theory is presented in the microeconomics stream of courses, it is general enough to be applicable in a number of other areas other than microeconomics. As an example, international economics provides many natural examples of general equilibrium analysis pertaining to the interdependence among many countries that produce and exchange commodities with each other. 79 Another example is the more modern treatment of macroeconomics which is primarily concerned with a general equilibrium system of at least four different aggregate markets, namely, the commodity market, the labour market, the money market, and the bonds market. In fact, the so-called modern theory of "fixed-price equilibria" attempts to validate macroeconomic theory by providing a micro foundation to macroeconomics. This attempt to bridge the two main components of economics has lent some credibility to economic analysis in the face of outside criticism that the methodologies of micro and macroeconomics have been too far apart. The heading of this section is Walrasian Equilibrium, yet we have been talking about general equilibrium throughout this section. General equilibrium analysis is named after the French economist Marie Esprit Leon Walras (1834 1910) who was born in Evreux, France. He studied literature and science but twice failed the entrance exam to the prestigious Ecole Polytechnique a Paris as a result of his poor mathematics. He had no formal training in economics and so his perspective and economic intuition was self-taught and commonsensical. Despite his lack of formal training, Walras was appointed the chair of professor of political econo...
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- Spring '10