General equilibrium model

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In economics, a general equilibrium model depicts an economy as a whole and examines macroeconomic states of equilibrium. This differs from a partial model that only describes individual markets. General equilibrium models explain phenomena such as exchange , production , consumption , prices or unemployment .

General

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A general equilibrium model represents a hypothetical economy in which all consumers have complete, reflexive and transitive preferences about their consumption possibilities, i.e. are rational. The model is the largest possible micro-founded description of an economy and describes how consumers and producers, given a certain initial equipment, simultaneously choose consumption and production. The aim of this model is to examine general allocations and the equilibrium of an economy without resorting to the concept of partial markets.

The easiest way to explain the model is using the Edgeworth box (a pure barter economy) as an example . There is a fixed number of economic subjects who are provided with a certain initial set of goods and who can exchange these with one another. If every good is traded on the market at a given relative price (exchange ratio of the goods) , every economic agent will offer or demand so much that it optimizes its use . This will generally result in over- or under-offers for the individual goods markets. The central existential question of the general theory of equilibrium is now whether there are price systems such that all markets are cleared; This means that exactly as much of a good is offered as is in demand. One would also like to know whether the natural market forces are moving the economy towards a general equilibrium . This is the so-called stability of equilibrium. This model can be expanded to include production, uncertainty, or other components.

So it is a matter of finding a comprehensive understanding of a market economy through a bottom-up approach: You start with all individuals and companies, their preferences and production possibilities, and consider the resulting interaction with freely available information and the rational Behavior. In contrast to macroeconomics , actors are not combined into different aggregates in order to model the relationships between these aggregates, but each individual is considered individually.

history

The French physiocrats and the classical economics of Adam Smith and David Ricardo can be named as the first forerunners of this theory (with reservations) .

The first attempt in neoclassical theory to develop a comprehensive model for determining the relative prices in an economy came from Léon Walras , the founder of the Lausanne School . He wanted to turn the classical economics of Adam Smith and David Ricardo into an "exact science". So he tried to describe the economy mathematically . Abraham Wald and later Maurice Allais , Kenneth Arrow and Gérard Debreu described the existence and stability of a general equilibrium for a market economy with private property . Arrow, Allais and Debreu received the Alfred Nobel Memorial Prize for Economics for their work on general equilibrium theory (AGT) .

General equilibrium models

Fundamental General Equilibrium Models

These include in particular the Edgeworth box model , in which there is no production and only two consumers who have to agree on an allocation given a given initial configuration, and the Robinson Crusoe model , in which there is a consumer and a company and then the balance is examined. It should be noted here that there is no market power in these simplest general equilibrium models. So they do not really represent an economy with only one consumer, but with only one "type" of consumer. In other words, an economy with many consumers who are all the same, or in the Edgeworth box model, two "types" of consumers who are all the same.

Further developed general equilibrium models

The first General Equilibrium Model was developed by Léon Walras and is called the Walrasian Equilibrium Model . This term is also often used as a generic term for all general equilibrium models, but specifically only describes the basic model of Léon Walras. A very common and well-known further development is the Arrow-Debreu equilibrium model , in which there are any number of different consumers and producers who also consume goods of any quality and availability with regard to place and time. There is also private ownership of companies and resources here, and neither utility nor profit maximization problems need to have clear solutions. Thus the Arrow-Debreu equilibrium model is a relatively general and far-reaching further development of the basic Walrasian equilibrium model.

The problems typically examined for general equilibrium models are:

  • Existence ("Is there a state at all which fulfills the conditions of general equilibrium?"),
  • Efficiency ("Is there a state of affairs which, compared to the observed state of equilibrium, makes some consumers better off without harming others?"),
  • Uniqueness ("Are there only one or more different states of equilibrium?"), And
  • Stability ("Is there a mechanism that - for example by means of price adjustments - leads back to the equilibrium in the event of deviations from the equilibrium?").

Overlapping generations, uncertainty, asymmetrical information

Building on the basic general equilibrium models, there are still many extensions in which, for example, uncertainty, overlapping generations ( OLG model ), asymmetrical information or other market frictions are inserted.

Other equilibrium models

literature

  • Andreu Mas-Colell, Michael D. Whinston, and Jerry R. Green: Microeconomic Theory
  • Hal R. Varian: Fundamentals of Microeconomics
  • Kenneth Arrow and Frank Hahn: General Competitive Analysis , 1971