Essence of General Equilibrium Approach
This inherent simultaneity of numerous mutual interdependencies and decisions necessitates the abandonment of partial equilibrium approach and the adoption of an approach general enough it’ll take account of the basic mechanics of the whole economy. An analysis that treats the various individual economic units and markets as inter-related and attempts to trace the nullification of an economic event to bring out their mutual determinations. is know n as general equilibrium analysis.Equilibrium in till general sense the harmony of the multitude of forces emanating from the multitude of making units MJ as to equate the demand (I';) The magnitude of increase in the price of any such factor will in turn depend upon the magnitude of increase in the production of handloom cloth and on its elasticity of supply.Whether or not the prices of all factors will rise by the same percentage and their effect Oil The prices of handloom cloth and other commodities will depend on the relative importance of thc different factors of production in different firms or industries.iviii t Whatsoever the degree of the rise in the prices of factors
It will invariably stultify the fall in the price substitutes fur handloom cloth. assuming that they use the same factors. These changes in the various price-ratios will produce republic on the relative demand and vice-versa, (ixl Owing to a change in the prices’ the factors of production, there Will occur a substitution of dearer factors hy the relatively cheaper factors.tx, This process of substitution or factors shall in turn bring about a change in thc demand for the factors (and in their prices). and in the costs and prices all industries using them.