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Léon Walras (1834-1910)

Léon Walras (1834-1910). ECO 54 Spring 2007 http://myweb.liu.edu/~uroy/eco54/ Udayan Roy. Léon Walras (1834-1910). Elements of Pure Economics , 1874. Marginalists + Classics.

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Léon Walras (1834-1910)

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  1. Léon Walras (1834-1910) ECO 54 Spring 2007 http://myweb.liu.edu/~uroy/eco54/ Udayan Roy LEON WALRAS

  2. Léon Walras (1834-1910) • Elements of Pure Economics, 1874 LEON WALRAS

  3. Marginalists + Classics • Walras showed how the marginalists’ ideas of rational maximizing behavior could be combined with the classical economists’ ideas of the circular flow of income. LEON WALRAS

  4. All prices • He also showed how all prices could ultimately be determined by combining the two sets of ideas. LEON WALRAS

  5. Partial Equilibrium Analysis • Using the ideas of marginalists such as Cournot one could determine the price of, say, apples if one already knew the prices of other relevant goods such as oranges, which would be a substitute for apples to consumers, and labor, which is needed to produce apples. • This one-good-at-a-time approach is called partial equilibrium analysis. LEON WALRAS

  6. Weakness of Partial Equilibrium Analysis • But, by the same reasoning, to figure the price of oranges one would need to know the price of apples. • Besides, to figure the price of labor one would first need to know the prices of oranges and apples because the willingness of people to work would depend on how many apples and oranges could be bought with the hourly wage. LEON WALRAS

  7. Weakness of Partial Equilibrium Analysis • Therefore, there was no way to figure all three prices at the same time. LEON WALRAS

  8. General Equilibrium Analysis • It was Walras, however, who showed how a different approach called general equilibrium analysis could be used to find the prices of all goods at the same time. • Walras relied on the mathematical theory of simultaneous equations. LEON WALRAS

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