Partial equilibrium theory (19TH CENTURY- )

Developed by French economist Antoine Augustin Cournot (1801-1877) and English political economist Alfred Marshall (1892-1924), partial equilibrium theory examines the conditions of equilibrium in an individual market or in part of a national economy.

Partial equilibrium theory usually looks at the relationship between two economic variables, assuming other variables are constant in value.

Also see: general equilibrium theory, classical macroeconomic model, law of markets

Source:
A Marshall, Principles of Economics (London, 1890)

In economics, partial equilibrium is a condition of economic equilibrium which takes into consideration only a part of the market (with all other parts remaining constant) to attain equilibrium.

As defined by Leroy lopes, “A partial equilibrium is one which is based on only a restricted range of data, a standard example is price of a single product, the prices of all other products being held fixed during the analysis.”^[1]

The supply and demand model is a partial equilibrium model where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets. In other words, the prices of all substitute goods and complement goods, as well as income levels of consumers, are taken as given. This makes analysis much simpler than in a general equilibrium model, which includes an entire economy.

Here, the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium, efficiency and comparative statics. The stringency of the simplifying assumptions inherent in this approach makes the model considerably more tractable, but may produce results which, while seemingly precise, do not effectively model real-world economic phenomena.

Partial equilibrium analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any; hence, this analysis is considered to be useful in constricted markets.

Léon Walras first formalized the idea of a one-period economic equilibrium of the general economic system, but it was French economist Antoine Augustin Cournot and English political economist Alfred Marshall who developed tractable models to analyze an economic system.