Chapter 16, Problem 1RQ

To determine

The difference between the general equilibrium and partial equilibrium analysis.

Explanation of Solution

Partial equilibrium analysis is one which deals with the supply and demand interactions in a single market. However, in a partial analysis, the impact of changes in one market on the interrelated markets is ignored. On the other hand, a general equilibrium analysis is concerned with the impact of the whole markets which are interrelated. In reality, the changes in the price and quantity of one market influence the price and quantity of other markets. The feedback effects can lead to an accurate forecast in the related market for goods. When the feedback effects are ignored, it may lead to inaccurate predictions. For example, consider a change in the demand in a primary market. This may induce changes in the related markets. Hence, the price and quantity of other markets may also change. When the analysis is only partial, the initial changes in the primary market would only be considered and under the general equilibrium analysis, the overall changes in the related markets would be considered, taking into account the feedback effects.

Economics Concept Introduction

General equilibrium analysis: The general equilibrium analysis is the determination of equilibrium in all the related markets, when the simultaneous equilibrium is determined by considering the feedback effects.

Partial equilibrium analysis: The partial equilibrium analysis is done when the equilibrium in a single market is determined without consideration of the feedback effects.