Partial and General Equilibrium

Question 1

What is Partial Equilibrium?

Answer 1

An equilibrium position of an individual, a firm, or an industry.

Question 2

When are Individuals at equilibrium?

Answer 2

When marginal Utility is equal to the price

Question 3

When is a firm at Equilibrium?

Answer 3

A firm is at Equilibrium when it’s Marginal Revenue is equal to Marginal Cost

Question 4

When is an industry at Equilibrium?

Answer 4

When all firm’s marginal revenue is equal to all firm’s marginal cost and there is no tendency for a firm to exceed or to enter the industry

Question 5

What is General Equilibrium?

Answer 5

The Equilibrium of all Individuals, all firms and all Industries Simultaneously.

Question 7

List 6 assumptions of General Equilibrium

Answer 7

1. The tastes and habits of Consumers are known
2. Full employment of resources and labor
3. There is perfect competition in both commodity and factor markets.
4. The income of Consumers is given and constant
5. Factors of production are perfectly mobile
6. Constant return to scale.
7. All firms operate under identical costs
8. There is no change in techniques of production

Question 7

Mention 3 uses of General Equilibrium

Answer 7

1. It helps to understand the workings of the economy
2. It helps to understand the complex problem of the market
3. It helps to understand the price system
4. It helps to understand the input-output analysis

Question 8

What are the 2 limitations of General Equilibrium?

Answer 8

• Unrealistic Assumptions
• It is a static analysis (that is it remains the same).

Question 9

Define Equilibrium Market Price

Answer 9

It is the price where the quantity suppliers are willing and able to offer and exactly as the consumers are willing and able to accept.
It is the price Qd = Qs

Question 10

List 3 Consequences of fixing the price above Equilibrium

Answer 10

1. There will be an increase in price and those that cannot afford it will suffer.
2. Excess supply because the supplier wants more sales
3. Increase in demand for close substitutes
4. There will be much competition between suppliers of similar products.

Question 11

List 3 Consequences of fixing the price below Equilibrium

Answer 11

1. Smuggling to other countries to make more sales.
2. Excess demand because the prices are low
3. Artificial scarcity due to excess demand
4. Low supply because suppliers are running at a loss