In this article we will discuss about:- 1. Interdependence in the Economy 2. Graphical Treatment of a Simple General Equilibrium Model 3. Static Properties of a General Equilibrium State 4. General Equilibrium of the Production Sector and the Consumption Sector (Under Perfect Competition) 5. Prices of Commodities and Factors 6. Factor Ownership and Income Distribution and Other Details. Interdependence in [...]
Three static properties are observed in a general equilibrium solution, reached with a free competitive market mechanism: (a) Efficient allocation of resources among firms (equilibrium of production). (b) Efficient distribution of the commodities produced between the two consumers (equilibrium of consumption). (c) Efficient combination of products (simultaneous equilibrium of production and consumption). These properties are called marginal conditions of Pareto [...]
In this section we attempt to show how a simple economy with perfectly competitive production and factor markets will have an inescapable tendency toward a general equilibrium solution. Assumptions: 1. Two substitute commodities are produced, X and Y, by two perfectly competitive industries (markets). 2. There are two factors, capital K and labour L, whose markets are perfectly competitive. The [...]