Partial equilibrium analysis

In economics , one speaks of partial equilibrium analysis if one only looks at the market that is directly affected.

Graph for consumer surplus, producer surplus, supply, demand and balance

Supply and demand curves are used to show the change in price and quantity. Producer and consumer surplus are used to measure the welfare effect on market participants. A partial equilibrium analysis either ignores the effect on other industries of the economy or assumes that the sector in question is very small and therefore has no significant influence on other industries.

General

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George Stigler defines partial equilibrium as follows: “A partial equilibrium is an equilibrium that is based on only a limited range of data. A standard example is the price of a single product, the prices of all other products are kept fixed during the analysis. "

The “supply and demand model” is a “partial equilibrium model” in which the clearing of the market is achieved independently of the prices and quantities of other markets. The prices of all substitutes and complements , as well as the income level of the consumers, are constant. This makes the analysis much easier than in the general equilibrium model, in which the whole economy is considered. In contrast to the partial equilibrium analysis, the general equilibrium analysis takes into account the connection between the import and export sectors and then looks at the effects of the measures on several areas of the economy. It uses supply curves to represent equilibria and measures welfare with aggregated welfare functions or indifference curves .

In partial equilibrium, the dynamic process is that prices adjust until supply meets demand. It is an effective and at the same time simple technique that allows the analysis of balance, efficiency and comparative statics . A number of basic assumptions are made here that simplify the model and therefore make it much more controllable. However, there is a risk that the results will be skewed and that real economic phenomena will be misrepresented.

history

The first record of the idea of economic equilibrium within a period in the general economic system comes from Léon Walras . However, it was the French economist Antoine Augustin Cournot and the English economist Alfred Marshall who developed controllable models for the analysis of economic systems.

Assumptions

The price of the good is given and constant for consumers.

Consumers' preferences , habits and incomes are constant.

The prices of the production factors of a good and of other dependent goods (substitutes or complements) are known and constant.

Industry easily receives its factors of production at a known and constant price, appropriate to its production methods.

Prices of products that help the production factor manufacture and prices and quantities of other factors are known and constant.

There is perfect mobility of the factors of production between work and the locations.

The above points relate to a perfectly competitive market , but can be extended to monopoly competition, oligopoly , monopoly and monopsony .

When a partial equilibrium analysis is sufficient

When does Partial Equilibrium Analysis give us good answers about the effects of changes in e.g. B. Taxes? When is this analysis sufficiently accurate?

The partial equilibrium analysis is sufficient if the repercussions of initial measures are so small that they can be neglected without falsifying the analysis. This is e.g. E.g. the case when people shift their demand away from one taxed good to countless other goods. The prices of all these goods change just a little. The total demand for the other goods can be neglected, since the price change of the other goods has only a very small effect on the supply and demand curve of the industry analyzed.

Under these circumstances, the partial equilibrium analysis can provide good approximations for future developments.

Because cigarette spending is only a small part of individual income , the increase in prices will have little effect on general consumer behavior. Although the reduced amount of demand for cigarettes changes the total demand for labor slightly, this effect is so small that it will have no real impact on wages. The tax will also have little effect on the return on investment .

Applications

Partial equilibrium analysis can be applied to perfect competition, monopoly competition, oligopoly, monopoly and monopsony. The following applications are used in perfect competition.

A consumer is in equilibrium when he achieves his welfare-maximizing, aggregated expenditure, which he makes dependent on certain conditions with regard to his preferences, income, price and supply of goods etc.

A producer is in equilibrium when he maximizes his profit.

A company is in equilibrium when it has no incentive to change its production.

A short-term partial equilibrium analysis on a perfect market is defined by a price as well as the maximum utility quantities sold and the maximum profit quantities offered, where the sum of sales equals the sum of purchases.

Short-term view: marginal revenue = marginal costs

Algebraic: ${\ displaystyle MR = MC}$

In market equilibrium:, where consumer demand and producer offers. ${\ displaystyle D (p) = S (p)}$ ${\ displaystyle D (p)}$ ${\ displaystyle S (p)}$

In the long-term partial equilibrium analysis , the market has many potentially active companies that share the same technology and therefore the same cost structure.

Consequence:

In the long-term partial equilibrium, all active companies make zero profits.

In the long-term partial equilibrium, all companies produce with the optimal company size, i.e. H. the unit costs are minimized for every factor used.

The long-term equilibrium price corresponds to the long-term minimum unit cost.

Long-term view: Long-term marginal costs = marginal revenue = average revenue = long-term average cost

Algebraic: ${\ displaystyle LMC = MR = AR = LAC}$

An equilibrium arises in an industry when a normal profit is achieved through the industry. This is the case when no new company wants to enter or leave the industry.

There is always only one price for each product on the market. The amount of goods purchased by buyers is equal to the total amount produced by different companies. All companies therefore produce until this is reached and sell the product at the market price. ${\ displaystyle MR = MC}$

Factors of production, d. H. Land, labor, capital and entrepreneur are in equilibrium when paid high enough to maximize income. Here price = marginal product applies .

At this price there is no incentive to look for other employment.

The set of factors the homeowners want to sell should be equal to that the business owners are willing to lend.

Restrictions

Partial equilibrium analysis is limited to a specific market.

It is not possible to examine the interrelationships between all parts of the economy.

Without considering the assumptions that separate the study of a particular market from the rest of the economy, partial equilibrium analysis will fail.

The partial equilibrium analysis is not suitable to explain the consequences of economic unrest in markets that trigger changes in demand and supply, movements between one market and another, and thus waves of second and third degree changes in the entire market.

Differences between Partial and General Equilibrium

Partial balance	General balance
Developed by Alfred Marshall Related to a variable Based on two assumptions Ceteris paribus Other markets are not affected by changes in one market Everything else is constant, the price of a good is fixed	First developed by Léon Walras. More than one variable or the whole economy is taken into account It is based on the assumption that different sectors are interdependent There are changes in one sector because of a change in another The prices of goods are determined simultaneously and mutually Therefore all product and factor markets are in equilibrium at the same time

literature

Robert S. Pindyck and Daniel L. Rubinfeld: Microeconomics , 6th edition from Pearson Studium Verlag
Stiglitz: Economics , 2nd edition; International standard textbooks in economics and social sciences , Oldenburg
Emil-Maria Classen: Fundamentals of the macroeconomic theory , (series Vahlens handbooks of economic and social sciences ), Verlag Vahlen, Munich 1980, ISBN 978-3800602223 .

Web links

Rationale for Partial Equilibrium modeling (EN)

Individual evidence

↑ Excerpt from the book: Policy and Theory of International Trade

^ TR Jain: Microeconomics and Basic Mathematics . VK Publications, New Delhi 2006-07, ISBN 81-87140-89-5 , p. 28.

↑ ML Jhingan: Microeconomic Theory . Vrinda Publications, 6th edition, ISBN 81-8281-071-X , p. 130.

↑ Joseph E Stiglitz: Microeconomics: Volume 1 on Economics 2010.

^ Stefan Schleicher: Competition and industrial structure . Archived from the original on March 19, 2013. Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. Retrieved June 18, 2015. @1@ 2

↑ Ram Krishna Mandal: Microeconomic Theory . Atlantic Publishers & Dist, 2007, p. 313.

^ Equilibrium . Retrieved October 4, 2011.

^ Economics Online . Retrieved October 4, 2011.

Explanation of partial equilibrium

Partial Balance Fundamental

[1] Excerpt from the book: Policy and Theory of International Trade

[2] TR Jain: Microeconomics and Basic Mathematics . VK Publications, New Delhi 2006-07, ISBN 81-87140-89-5 , p. 28.

[3] ML Jhingan: Microeconomic Theory . Vrinda Publications, 6th edition, ISBN 81-8281-071-X , p. 130.

[4] Joseph E Stiglitz: Microeconomics: Volume 1 on Economics 2010.