A Theoretical Exposition of General Equilibrium Analysis

Abstract

The general equilibrium theory believes that any economy is fundamentally characterized with interdependence among markets of commodities. Factor prices depend on the demand and supply of the various inputs. Where consumers’ demand for various goods and services depend on their taste and incomes, consumers’ incomes depend on the amounts of resources they own and factor prices. The upshot of this discussion is therefore that, there is general interdependence of all variables in the economy: for everything dependents on every other thing. General equilibrium theory allows the tremendous complexity of the real world by viewing the economy as a vast system of mutually interdependent markets.  The general equilibrium model has a solution under specific assumptions and observing the assumptions yield an optimal allocation of resources and welfare improvement. The study concludes that the proof of the existence of general equilibrium for a perfect competitive economy is very important as it results in an efficient allocation of resources and improves the welfare in general.