Question

What is the difference between partial equilibrium and general equilibrium? Discuss the advantages of restricting the domain for quasi-linear preferences in the welfare analysis.

Answer 1

1. Partial equilibrium is a condition of equilibrium in the theory of economics which takes into consideration only a part of the market to attain the equilibrium. It studies the effect of one variable upon the other without considering the effect of other factors.
   • For example, law of demand is studied in relationship with price by keeping all other factors constant.

   • It is an illegitimate caricature that leaves out many parts of the nexus of determining variables and includes only a partial list of determinants. It is a butchering of scientific analysis by incompetent people such as Alfred Marshall, Vilfredo Pareto, Robert Solow, Kenneth Arrow, Robert Lucas and many others.

   • Since Marshall is truly the most influential father of mainstream neoclassical economics, and since Solow, Arrow and Lucas are extremely influential, their followers will be outraged by this statement.

   • Leon Walras fought a lone battle against the blasphemy of partial equilibrium, but sadly, the ordinary students of economics were not bright enough and determined enough to follow Walras and discard Marshall.

2. General equilibrium is the equilibrium that studies an economic phenomenon by taking all the aggregate units in the economy into consideration.
   • For example, product prices make demand for each commodity equal to its supply and factor prices make the demand for each factor equal to its supply so that all product markets and factor markets are simultaneously in equilibrium.
   • It is a legitimate analytical construct that includes all determining variables.
   • For example the market demand for a traded good x depends on the size of the population (N), the income of the buyers (Y), and the price of x given as p, as well as the prices of all goods that are substitutes or complements of x. It is illegitimate to leave out any of the determining variables.