Lon Walras 18341910

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Léon Walras (1834-1910)

• ECO 54 Spring 2007
• http//myweb.liu.edu/uroy/eco54/
• Udayan Roy

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Léon Walras (1834-1910)

• Elements of Pure Economics, 1874

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Marginalists Classics

• Walras showed how the marginalists ideas of
  rational maximizing behavior could be combined
  with the classical economists ideas of the
  circular flow of income.

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All prices

• He also showed how all prices could ultimately be
  determined by combining the two sets of ideas.

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Partial Equilibrium Analysis

• Using the ideas of marginalists such as Cournot
  one could determine the price of, say, apples if
  one already knew the prices of other relevant
  goods such as oranges, which would be a
  substitute for apples to consumers, and labor,
  which is needed to produce apples.
• This one-good-at-a-time approach is called
  partial equilibrium analysis.

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Weakness of Partial Equilibrium Analysis

• But, by the same reasoning, to figure the price
  of oranges one would need to know the price of
  apples.
• Besides, to figure the price of labor one would
  first need to know the prices of oranges and
  apples because the willingness of people to work
  would depend on how many apples and oranges could
  be bought with the hourly wage.

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Weakness of Partial Equilibrium Analysis

• Therefore, there was no way to figure all three
  prices at the same time.

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General Equilibrium Analysis

• It was Walras, however, who showed how a
  different approach called general equilibrium
  analysis could be used to find the prices of all
  goods at the same time.
• Walras relied on the mathematical theory of
  simultaneous equations.