Transcript Léon Walras (1834-1910) ECO 54 Spring 2007 Udayan Roy

Léon Walras (1834-1910)
ECO 54 Spring 2007
http://myweb.liu.edu/~uroy/eco54/
Udayan Roy
LEON WALRAS
Léon Walras (1834-1910)
• Elements of Pure Economics,
1874
LEON WALRAS
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.
LEON WALRAS
All prices
• He also showed how all prices could
ultimately be determined by combining the
two sets of ideas.
LEON WALRAS
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.
LEON WALRAS
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.
LEON WALRAS
Weakness of Partial Equilibrium
Analysis
• Therefore, there was no way to figure all
three prices at the same time.
LEON WALRAS
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.
LEON WALRAS