Question

What is the difference between a partial equilibrium analysis and a general equilibrium analysis? When analyzing the determination of prices in a market, under what circumstances would a general equilibrium analysis be more appropriate than a partial equilibrium analysis?

Answer 1

Partial equilibrium is the counterpart of micro- economic analysis.lt is also preferably called purticular equilibrium analysis.partial Equilibrium is a condition of economic Equilibrium which takes into consideration only a part of the market to attain Equilibrium. General equilibrium analysis determines the prices and quantity in all market simultaneously .

Following are the main differences between partial Equilibrium analysis and general equilibrium analysis.

* Partial Equilibrium analysis is concerned with a purticular market where as general equilibrium analysis focusses on many markets.

* We refer to partial Equilibrium analysis when a single firm or single community is in Equilibrium or we can say that it's the analysis of part of an economy. On the other hand general equilibrium analysis tries to provide an understanding of the whole economy looking at micro perspective.

* Partial equilibrium analysis is concerned with one variable while all other variables are kept in isolation.General Equilibrium, studies a number of economic variables, their inter relation and interdependence for understanding economic system.

* General equilibrium analysis allows both prices and quantites to adjust and partial Equilibrium analysis looks only at prices.

* General equilibrium analysis takes into account of spill over, unlike partial Equilibrium analysis.

* Partial Equilibrium analysis is short - run analysis and general equilibrium analysis takes into account long - run adjustments

General equilibrium analysis will be more appropriate than partial Equilibrium analysis under the following circumstances.

* If we want to include all the determining variables in our analysis, general equilibrium is the legitimate analytical construct for us.

* If we want to understand how an economic system works, we have to use general equilibrium analysis . We will be able to analyse the causes of disequilibrium and possible ways of restoring equilibrium.

* General equilibrium analysis comes to handy when we want to make future predictions about the consequences of an autonomous economic event. We will be able to forecast the changes a policy implementation may have on prices and quantites.

*It's a powerful tool for analysing the interdependence between different sectors in an economy.

Some economists are of the opinion that only general equilibrium analysis should be used and partial Equilibrium analysis should be rejected. They think that partial Equilibrium analysis is an illegitimate caricature that leaves out many parts of the nexus of determining variables and includes only a partial list of determinants. They even insist that partial Equilibrium analysis is a butchering of scientists analysis by incompetent people such as Alfred Marshall, Robert Lucas Kenneth Arrow , Robert sollow and many others.