General Equilibrium Theory

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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.

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