Lecture: 4 Micro Economics By

1. Lecture: 4 Micro Economics By Sri Sastri Ram Kachari, Assistant Professor & Head Department of Economics, Radhamadhab College, Silchar-06

2. What is equilibrium in Economies ? • The term ‘equilibrium’ is derived from two Latin words called “acqui” and “Libra”. “Acqui” means equal and “Libra” refers to balance. Hence, equilibrium means ‘equal balance’. The term ‘equilibrium’ is substantially used in physics. In physics, equilibrium refers to a state of balance. An object is considered to be in a state of equilibrium, when two opposing forces balance each other on the object under review. The importance of the equilibrium concept not just limits to physics. The application of the concept of equilibrium is vital in economics that makes some economists call economics as equilibrium economics. In economics, equilibrium denotes a state in which the two opposite forces are unable to influence each other.

3. Notions of equilibrium • Partial Equilibrium • a single product, the prices of all other products being held fixed during the analysis. • The supply and demand model is a partial equilibrium model where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets. In other words, the prices of all substitutes and complements, as well as income levels of consumers are constant. This makes analysis much simpler than in a general equilibrium model which includes an entire economy.

4. Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium , efficiency and comparative statics . The stringency of the simplifying assumptions inherent in this approach make the model considerably more tractable, but may produce results which, while seemingly precise, do not effectively model real-world economic phenomena.

5. Partial equilibrium analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any. Hence this analysis is considered to be useful in constricted markets.

6. Leon Walras first formalized the idea of a one-period economic equilibrium of the general economic system, but it was French economist Antoine Augustine Cournot and English political economist Alfred Marshall who developed tractable models to analyze an economic system

7. General Equilibrium • In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall (or "general") equilibrium. General equilibrium theory contrasts to Partial equilibrium, which only analyzes single markets. As with all models, this is an abstraction from a real economy; it is proposed as being a useful model, both by considering equilibrium prices as long-term prices and by considering actual prices as deviations from equilibrium.

8. General equilibrium theory both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold. The theory dates to the 1870s, particularly the work of French economist Leon Walras in his pioneering 1874 work Elements of Pure Economics.

9. Distinguish between Partial Equilibrium and General equilibrium • Partial equilibrium studies equilibrium of individual firm, consumer, seller and industry. It studies one variable in isolation keeping all the other variables constant. • General Equilibrium, studies a number of economic variable, their inter relation and inter dependencies for understanding the economic system. • Partial equilibrium = study of equilibrium in one market in isolation • General equilibrium = study of equilibrium of all markets simultaneously

10. Until now, we only looked at one market at a time (partial equilibrium) exception: increasing-cost industry analysis • But: changes in one market can (and usually do) affect other markets as well • If two goods are .related. (Complements or substitutes), then their markets are linked Changes to demand/supply in one market affect the equilibrium in linked markets • Partial equilibrium analysis would not consider all this feedback between linked markets

11. Lecture: 5 Development and Environmental Economics By Miss Pratiti Singha, Assistant Professor(Part Time), Department of Economics, Radhamadhab College, Silchar-06