Question

Discuss Leon Walras’s theories of production and capital formation with regard to market structure and the necessary conditions of equilibrium. Why is ‘comparative statics’ applied to these theories? (Essay question)

Answer 1

Leon Walras was the initiator of models of purely competitive general economic equilibration and equilibrium, of mathematical treatments of them, and of many aspects of microeconomic theory. In his period of maturity as a theoretician, he developed a comprehensive model that includes exchange, production of non-durable goods, production of capital goods, and monetary behaviour. That model features irrevocable disequilibrium behaviour and capital accumulation, and its equilibrium is therefore path dependent. His last theoretical effort, which was a failure but nevertheless very influential, was to try to develop a virtual and therefore path-independent model that would justify his static equation system.

Walras's system, then, given a capital stock, we obtain a given flow amount of capital services. This can be considered the "supply" of capital services. The "demand" for capital services is merely the consumers' demand for an amorphous commodity he called "savings in general" which arise from consumers' desires to transfer some amount of current purchasing power to demand future goods and services.

* There are two conditions that must be met for an object to be in equilibrium. The first condition is that the net force on the object must be zero for the object to be in equilibrium. If net force is zero, then net force along any direction is zero.

* Comparative statics is commonly used to study changes in supply and demand when analyzing a single market, and to study changes in monetary or fiscal policy when analyzing the whole economy