L. Walras Concept of Equilibrium Assignment Example | Topics and Well Written Essays - 2750 words

L. Walras Concept of Equilibrium - Assignment Example Prices are quoted in the market for each commodity at each instant of the trading process; b. The traders are price takers and they behave competitively i.e. the existence of perfect competition; and c. For any commodity, any transaction is not allowed to take place out of the equilibrium. According to Walras (1874), considering any particular market, if all other markets in an economy are in equilibrium, then that specific market must also be in equilibrium. Also, the sum of all excess demands and excess supplies (which have both positive and negative values) must be equal to zero. The equilibrium is attained through a process called â€Å"groping† in which each agent calculates its demand for a particular commodity and submits it to an auctioneer. This auctioneer matches the supply and demand of the commodities and tries to reach an equilibrium price. â€Å"Trading stops† at the point where the demand and supply for all the commodities with positive prices equate and demand for goods with a price of zero does not exceed their supply (Walras, 1954). At this point, equilibrium is achieved by the process of Groping. Answer 2 The two actors i.e. households and firms both face the problem of scarcity and choice. In the case of households, they attempt to spend their scarce resources, i.e. income, on those goods and in such a way that gives them the maximum utility. They have to bear the opportunity cost when they forgo the benefit of one commodity to avail the benefit of another. According to the law of diminishing marginal utility, as a person consumes more and more units of a commodity, he obtains less and less amount of satisfaction from every additional unit that he consumes. A point comes when the additional utility even becomes negative. For instance, over-consumption of drinking water is harmful to health According to the  principle; the total utility is maximized when utilities obtained from each of the commodities consumed become equal. (S amuelson, 1939) The firms face the same problem and they want to utilize their scarce resources, i.e. factors of production, in such a way that maximizes their profits. Just like the households, they too have to bear the opportunity cost when they forgo the usage of one factor to avail the benefit of another factor. The law of diminishing returns is similar to the working of the law of diminishing utility according to which as more and more units of a factor are employed with other factors remaining constant, the marginal product diminishes. Similarly, a point comes when the marginal product becomes negative. For instance, a certain number of units of labor can produce effects on a unit of land. More than enough units cause disturbance and disharmony in the working environment. The principle can also be applied to firms. The total product is maximized when marginal products of all the factors employed become equal. (Samuelson, 1939) Therefore, the two actors have to undergo the same processes to achieve their respective objectives. Answer 3 In Marshallian long-period equilibrium, the economies and diseconomies of scale determine whether an industry will be operating under increasing, decreasing or constant returns to scale. When the economies and diseconomies of scale are equal, they cancel each other and there is no net effect on the industry.