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. Price Elasticity Of Demand

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

    An approach to economics that relates supply and demand to an ...
  6. Disequilibrium

    A situation where internal and/or external forces prevent market ...
Related Articles
  1. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

  2. Understanding Supply-Side Economics
    Economics

    Understanding Supply-Side Economics

  3. Eyeing China? Consider These Economic ...
    Economics

    Eyeing China? Consider These Economic ...

  4. What causes inflation, and does anyone ...
    Savings

    What causes inflation, and does anyone ...

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center