Question

Discuss Leon Walras’s theories of production and capital formation with regard to market structure and the necessary conditions of equilibrium. Why is ‘comparative statics’ applied to these theories? (Essay question)

Answer 1

Walras's law is a theory related to economy in which if there is excess supply in the market ,it must be matched or compensated by excess demand in some other market,it states that an examined market must be in equilibrium if others are also in equilibrium.

It is based on equilibrium theory according to which That every market must be clear of any excess supply or demand to be in equilibrium, for any excess supply over some demand there must be some excess demand over supply for some other good for the market to be in equilibrium.

It assumes thet when there is excess demand then there will be a price rise while in case of excess supply there will be decreased price so that the equilibrium can be maintained .

In case of producers if the Interst rate is high they will invest less while do the opposite if interest rate falls.

All these theories based on certain assumptions such as

Consumer will work according to their self Interest

Firm will look forward to maximize their profit.

Limitation of this theory -

There was a difference between theory and observations because it was a mathematical approach which didn't consider the utility of a product , for example if there is excess demand of food item then price rise will not lower the demand as it is having different utility and necessity.