Bog'liq T.Y.B.A. Economics Paper - IV - Advanced Economic Theory (Eng)
5.2 GENERAL EQUILIBRIUM AND ITS EXISTENCE The problem of existence of general equilibrium is related to
the behaviour of buyers and sellers in the market and how it
influences their demand and supply curves. An equilibrium is said
to exist when the demand and supply curves equals at a positive
price. Such a price is called the equilibrium price. The quantity
demanded and supplied at that price is called the equilibrium
quantity. There is neither excess demand nor excess supply at the
equilibrium price. The excess demand is zero at this price.
Symbolically,
Where E
D
is excess demand, Q
D
is the quantity demand and Q
S
is
the quantity supplied.
Excess demand is the point where the demand curve cuts
the supply at a certain price. For the existence of equilibrium the
two curves should intersect each other at a positive price.
There are two conditions for the existence of general
equilibrium at a positive price:
1. All consumers maximise their satisfactions and all producers
maximise their profits at that price.
2. All markets are cleared at that price, that is, the total amount
demanded equals the total amount supplied in both the
commodity and factor markets at a positive price.
D D S E Q Q 0
FIGURE 5.1 EXISTENCE OF GENERAL EQUILIBRIUM The above figure illustrates the existence of general
equilibrium when the demand curve D intersects the supply curve S
at point E and OP price is determined which is the positive price. It
clears the market at OQ quantity demanded and supplied. This
figure may be presumed to apply to the commodity market as well
as the factor market.
