General Equilibrium Models
- Primary authors:
General Equilibrium models view the economy as an interrelated system of perfectly competitive markets in which the equilibrium values of all variables of interest are simultaneously determined. There are few exogenous variables, restricted largely to physical constraints such as given preferences and endowments. Feedback between markets is an important consideration, notably wealth effects whereby although endowments are given, their value varies with prices.
Remark: cf Partial Equilibrium where only a subset of variables are examined and all others are held constant i.e. no feedback to other markets and most importantly no wealth effects (see for example Classical_Demand_Theory).
The basic one consumer one producer economy:
No production possibilities, rather exchanging initial endowments: