General Equilibrium: From an Informational Perspective
General Equilibrium: From an Informational Perspective
Introduction
General Equilibrium Theory has long been one of the major intellectual developments in economics. Generally speaking, general equilibrium is a market situation where demand and supply requirements of all decision makers (buyers and sellers) have been satisfied without creating surpluses and shortages. General equilibrium analysis addresses mainly on how this large number of individuals and their decisions balance supply and demand, thereby leading to a sufficient allocation of goods and services in the economy.
The original idea of general equilibrium can date back to Walras. L, who illustrated that it is the price system that plays the crucial role in the disparate individual decisions. As we may be all familiar with, the standard treatment of equilibrium in a single market, which is known as partial equilibrium, lies in the single price playing the role of equilibrating the supply and demand so that all buyers and suppliers who want to buy or sell at the underlying price can, and do without any excess and shortage. However, can the extension from the equilibrium in a single market to the general markets automatically hold? Does such a general equilibrium exist?
A solution to these problems comes from the idea that the competitive price mechanism leads to efficient outcomes. The relevant notion of efficiency was formalized and tied to competitive equilibrium by Vilfredo Pareto (1909) and Abram Bergson (1938). The concept of Pareto Optimality was introduced to prove that there is an equivalence between Pareto Optimality and competitive price equilibrium.
2. Information: a new prospective
With the development of Game Theory and Information Economics, information has been taken into account when discussing general equilibrium. It is apparent that the party which has more information will get more benefit over the counterpart during a bargain deal. Thus, information does evidently affect the