Walras' Law - Explained
What is Walrus' Law?
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What is Walras' Law?
In economics, Walras law is a theory that maintains that surplus in one market must be adequately complemented by insufficiency in another market so that the market will be in equilibrium. Walras law was developed in 1874 by Lon Walras, a French economist. This economic theory aims at achieving an equivalent position in the market and for markets to be in equilibrium, excess demand in one market must mean an excess supply in another market. In a book, Elements of Pure Economics published by Lon Walras in 1874, the Walras law holds that a general equilibrium is created in the market if surplus in one market mean shortage in another market. Here are some key points you should know about Walras law;
- Walras law is economic theory that focuses on how equilibrium is achieved in markets. The theory was developed by Lon Walras in 1874.
- According to Walras law, equilibrium is achieved in the markets when there is excess demand in one market and excess supply in another market.
- Shortage in a market and surplus in another market is important for achieving an equivalent positions if markets.
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How does Walras' Law Work?
According to the proponent of Walras' law, markets are forced into a state of equilibrium when there is excess supply ion one market and excess demand in another market, this is however achieved through the help of a supreme force and not just market forces. The rationale behind this law is that excess demand invokes an increase in the price of goods while excess supply means there will be a decline in the process of goods, therefore, achieving a balance in the market. The believe that producers aim to maximise profit in the market while consumers seek interests that will benefit them.
Limitations of Walras' Law
There are certain drawbacks on Lon Walras Walras law, one of the major limitations is that it is difficult to portray the law mathematically. There are no mathematical equations that represent how equilibrium is achieved in all markets if there is excess supply in one market and excess demand in another market. Also, the utility function of Walras law was regarded as not realistic by critics, and since the utility function cannot be practised, the law holds no ground.
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- Diminishing Marginal Utility
- Sunk Costs
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