General Equilibrium and welfare economies Essay

General Equilibrium and welfare economies - Essay Example A deductive structure that tolerates a contradiction does so under the penalty of being useless since any statement can be derived flawlessly and immediately from that contradiction. In its mathematical form, economic theory is open to an efficient scrutiny for logical errors." We will try to be coherent, and we will do our best to avoid any contradiction when speaking about General Equilibrium and Welfare Economics. It is easy to get confused with these microeconomic models, so we will deal with them using simple and logical words. The most important thing is to understand those models and to apply the knowledge in our everyday life as much as possible. Microeconomics is defined by the Wikipedia (2005d) as "the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. It considers individuals both as suppliers of labour and capital and as the ultimate consumers of the final product. It analyzes firms both as suppliers of products and as consumers of labour and capital." It is necessary to understand this simple definition to apply that knowledge to General Equilibrium and Welfare Economics. ... Harberger (2002) speaks about the importance of Microeconomics as follows: "The strength of microeconomics comes from the simplicity of its underlying structure and its close touch with the real world. In a nutshell, microeconomics has to do with supply and demand, and with the way they interact in various markets." In microeconomic theory, the partial equilibrium supply and demand economic model was originally conceived by Alfred Marshall when he tried to explain changes in the price and quantity of goods sold in competitive markets. This microeconomic model just deals with an imperfectly competitive market. It has its foundation in the theories used by some economists before Marshall like Adam Smith, and it is one of the most fundamental models of economic schools in the present time, widely used as a basic building block for many other economic models. The theory of supply and demand is important for understanding a market economy as it is an explanation of the mechanism by which many economic decisions are made. Nevertheless, unlike General Equilibrium models, the supply and demand theory offers a partial equilibrium model fixed by unexplained forces. (Wikipedia, 2005d). The theory of supply and demand frequently considers that markets are perfectly competitive. This means that there are many buyers and sellers in the market. It also means that none of them have the capacity to influence the price of the good. In real life, this assumption usually fails because some economic agents have the ability to influence prices. (Wikipedia, 2005d). Wikipedia, 2005h In Microeconomics we say that the market "clears" at the point where the supply and demand find a balance at a given price. It means that the amount of a commodity at a given price equals the