General Equilibrium and Market Linkages

General equilibrium and market linkages Partial equilibrium analyzes one market in isolation. General equilibrium takes into account the interconnections between all markets. It is a bridge between micro and macro. General Equilibrium Walrasian equilibrium: prices in all markets simultaneously equalize supply and demand. Arrow-Debreu: formalization of the conditions for the existence and efficiency of general equilibrium. Interconnections between markets Spillovers: Increase in oil prices → transport costs → food prices Increase in wages in one sector → labor flows from others Complementarity: increase in demand for electric vehicles → increase in demand for lithium. Substitution: increase in meat prices → increase in demand for fish. Walras' Law Walras' Law: the sum of excess demands across all markets = 0. If n-1 markets are in equilibrium, the n-th one is as well. Significance for analysis Systems thinking: changes in one place spread throughout the economy. Unintended consequences: policy in one market affects others. Macro foundations: aggregated variables are the result of micro-decisions on many markets. For the investor Sector linkages: understanding the connections between industries to forecast spillovers. Supply chain analysis: upstream and downstream effects. Macro-micro connection: how macro shocks translate into sectoral impacts.