General equilibrium theory

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. General equilibrium theory contrasts with the theory of partial equilibrium, which analyzes a specific part of an economy while its other factors are held constant. In general equilibrium, constant influences are considered to be noneconomic, or in other words, considered to be beyond the scope of economic analysis.^[1] The noneconomic influences may change given changes in the economic factors however, and therefore the prediction accuracy of an equilibrium model may depend on the independence of the economic factors from noneconomic ones.

General equilibrium theory both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold. The theory dates to the 1870s, particularly the work of French economist Léon Walras in his pioneering 1874 work Elements of Pure Economics.^[2] The theory reached its modern form with the work of Lionel W. McKenzie (Walrasian theory), Kenneth Arrow and Gérard Debreu (Hicksian theory) in the 1950s.