10.1 General Equilibrium

So far, we have used a partial-equilibrium analysis: an examination of equilibrium and changes in equilibrium in one market in isolation. In a partial-equilibrium analysis in which we hold the prices and quantities of other goods fixed, we implicitly ignore the possibility that events in this market affect other markets’ equilibrium prices and quantities.

When stated this baldly, partial-equilibrium analysis sounds foolish, but it need not be. Suppose that the government puts a specific tax on the price of hula hoops. If the tax is sizable, it will dramatically affect hula hoop sales. However, even a very large tax on hula hoops is unlikely to affect the markets for automobiles, doctors’ services, or orange juice. It ...

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