General Equilibrium Theory


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.

BREAKING DOWN '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.

  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. Fundamental Analysis

    How Influential Economists Changed Our History

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

    Understanding Supply-Side Economics

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

    What a Fed Delay Means for the ECB & BoJ

    The Fed’s continued delay has repercussions for more than just the U.S. economy and markets. The ECB and the BoJ may support the case for stocks in Europe.
  4. Economics

    Understanding Income Inequality

    Income inequality refers to the uneven distribution of income across a single economy.
  5. Economics

    Who is a Hawk?

    In the economic sense of the word, a hawk is someone who believes high interest rates should be maintained to keep inflation low.
  6. Investing Basics

    Explaining Fixed Exchange Rates

    A government using a fixed exchange rate has linked the value of its currency to the value of another country’s currency, or the price of gold.
  7. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  8. Term

    Public Goods & Free Riders

    A public good is an item whose consumption is determined by society, not individual consumers.
  9. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  10. Economics

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
  1. Do any markets not exhibit asymmetric information?

    Asymmetric information, when interpreted literally, means that two parties to an economic transaction have different information ... Read Full Answer >>
  2. What are the benefits of using ceteris paribus assumptions in economics?

    Most, though not all, economists rely on ceteris paribus conditions to build and test economic models. The reason they do ... Read Full Answer >>
  3. What factors determine the strength of the crowding out effect?

    One of the largest debates among economists, at least in fiscal policy, centers on the strength of the crowding-out effect. ... Read Full Answer >>
  4. How does a monopoly contribute to market failure?

    According to general equilibrium economics, a monopoly can identify or create a rigid demand curve, restrict supply and cause ... Read Full Answer >>
  5. How does marginal utility relate to indifference curves in microeconomics?

    The importance of indifference curve analysis to neoclassical microeconomic consumer theory can hardly be overstated. Until ... Read Full Answer >>
  6. Why are monopolistic markets inefficient?

    According to general equilibrium microeconomics, a monopoly provider is able to identify a highly inelastic demand curve; ... Read Full Answer >>
  7. What is the difference between hypothetical isolation and substantive isolation of ...

    Broadly speaking, two different approaches interpret ceteris paribus assumptions in economics. The first of these is known ... Read Full Answer >>
  8. Why is PPP (purchasing power parity) controversial?

    Purchasing power parity (PPP) has been a much-debated topic by economists for centuries. Proponents of the concept of PPP ... Read Full Answer >>
  9. What is general equilibrium theory in macroeconomics?

    General equilibrium theory is a macroeconomic theory that explains how supply and demand in an economy with many markets ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!