If the price of petrol rises, consumers tend to demand less of it. They may use their cars less and buy bicycles, and as a result, the price of bicycles rises and resources shift towards the manufacture of bicycles as new producers enter the market. In this way, different markets are connected, and a shock in one may ripple through the rest.
General equilibrium, also called Walrasian general equilibrium, attempts to explain the functioning of economic markets as a whole, rather than as individual phenomena. The theory was developed by the French economist Leon Walras. It stands in contrast with partial equilibrium theory, or Marshellian partial equilibrium, which only analyzes specific markets .
Often we tend to think of markets in isolation: we talk about the price of cars that brings supply into line with demand. what economists call partial equilibrium. General equilibrium theory considers the possibility of equilibrium across the whole economy, taking account of the linkages between markets. In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an overall general equilibrium. It is a market situation where demand and supply requirements of all decision makers (buyers and sellers) have been satisfied without creating surpluses or shortages . One might imagine that completely unfettered free markets would lead to muddle and instability – why would one expect that any kind of order would arise? General equilibrium theory has shown that under certain conditions there are prices that. bring about equilibrium in all markets. However, whether these conditions actually hold in practice is another matter.
Photo by Loe Moshkovska from Pexels https://www.pexels.com/photo/woman-in-black-long-sleeve-shirt-holding-bicycle-705121/