General Equilibrium Theory

AAA

DEFINITION of 'General Equilibrium Theory'

General equilibrium theory studies supply and demand fundamentals in an economy with multiple markets, with the objective of proving that all prices are at equilibrium. The theory analyzes the mechanism by which the choices of economic agents are coordinated across all markets.
General equilibrium theory is distinguished from partial equilibrium theory by the fact that it attempts to look at several markets simultaneously rather than a single market in isolation.

INVESTOPEDIA EXPLAINS 'General Equilibrium Theory'

The theory was first proposed by French economist Leon Walras in the 1870s, while the modern concept of general equilibrium was developed jointly by Arrow, Debreu and McKenzie in the 1950s. From the 1970s onwards, technological advances and increases in computing power made it possible to develop models for national economies and attempt empirical solutions for general equilibrium prices and quantities.

RELATED TERMS
  1. John R. Hicks

    A British economist who received the 1972 Nobel Memorial Prize ...
  2. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource ...
  3. Equilibrium

    The state in which market supply and demand balance each other ...
  4. Disequilibrium

    A situation where internal and/or external forces prevent market ...
  5. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity ...
  6. Neoclassical Economics

    An approach to economics that relates supply and demand to an ...
Related Articles
  1. Economics

    What is general equilibrium theory in macroeconomics?

    Achieving equilibrium of prices in a single or multi-market setting involves a bidding process that is informed precisely by demand.
  2. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  3. Economics

    Understanding Supply-Side Economics

    Does the amount of goods and services produced set the pace for economic growth? Here are the arguments.
  4. Economics

    What is a roll-up merger and why does it occur?

    Find out what a roll-up merger is and how it is executed. See why roll-ups might bring added efficiency and competition into a fragmented market.
  5. Economics

    What are the differences between internal and external economies of scale?

    Take a deeper look at the differences between internal and external economies of scale, and learn why internal economies offer more competitive advantage.
  6. Economics

    How does marginal cost of production relate to economies of scale?

    See how marginal cost of production relates to economies of scale, and why every company should be concerned with reducing its marginal costs.
  7. Professionals

    How are labor demand forecasts made in human resources planning?

    Discover how human resource planning might be used to estimate the correct demand for labor in a given market, both qualitatively and quantitatively.
  8. Economics

    How does a high discount rate affect the economy?

    Find out what would happen if the Federal Reserve decided to set a very high discount rate, the rate at which banks can borrow money from the Federal Reserve.
  9. Professionals

    How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a shortage or surplus.
  10. Economics

    No Exit: What Could Happen If the Eurozone Breaks Up?

    There is no exit strategy for nations in the eurozone or the EU because most members acknowledge that they are far better off together than apart.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center