General Equilibrium Analysis
However, looking from this angle, it would be committing a logical fallacy to say that the prodWi prices are determined first and then conveyed to thl consumers who thereafter make their optimum quantity adjustments. Similarly, it would be erroneous to say that the consumers first determine the quantities they wish to purchase and the market prices are decided only afterwards. This is so, because the factor prices cannot be determined till the firms have decided about the levels of output to be” produced.The levels of output to be produced cannot be decided unless the product prices are known. How can the product prices be known unless the consumers have received their incomes from the sale ‘of their factor services at certain prices’! No market CII! adjust in’ isolation. It cannot adjust without disturbing the equilibrium of other markets and without having these disturbances reflect back on itself.
In fad, the economy cannot he divided into watertight compartments. The various aspects of the economic system are closely related anti the whole process hangs together. It is just like an organic being that works as an integrated whole. No economic units are mutually exclusive; rather they arc knit together ill a mutually dependent way to form a unified whole. Every economic change will bring repercussions of a greater or less magnitude in every part of the economy. The ripples of effects of such a change pervade the entire economic system. Repercussions Change .
The relative preference for hand loom cloth will lead to a decrease in the demand for substitutes like mill-made cloth; thereby decreasing their prices and the prices of the factors of production used in their production .As a consequence of the aforesaid changes,the relative prices of hand loom c101h and substitutes will be changed in favour.(;v) The consumers will. therefore, be confronted with new price- ratios and this will go to modify the increase in demand for. and the prices or handloom cloth and its complements. At the same time. a similar modification will occur in respect of the demand and the prices of substitutes. Similar arguments will also apply for the factors of production in each market.’ (I’) The firms engaged in the production of handloom cloth and its complements ill be’ forced to pay higher prices to the factors of production employed by thcm. (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.