Particular Equilibrium Analysis: Definition, Importance and Limitations

Let us make an in-depth study of Particular Equilibrium Analysis:- 1. Definition of Particular Equilibrium Analysis 2. Importance of Particular Equilibrium Analysis 3. Limitations.

Definition of Particular Equilibrium Analysis:

Partial equilibrium analysis is the counterpart of microeconomic analysis. It is also preferably called ‘particular equilibrium’ analysis because the word ‘partial’ smacks of incompleteness of the analysis when there is nothing incomplete about it.

A large part of the economic analysis is built around the concept of equilibrium of a consumer, a resource owner, a firm or an industry.

It concerns itself with movements of particular economic units or particular industries towards equilibrium positions in response to the given economic conditions facing them. Thus, a household, with its given tastes and preferences, is confronted with given income and with given prices of services and goods.

The household must adjust its purchases so as to move towards equilibrium. A business firm, when faced with given demand conditions for its product, technological conditions and resource suppliers, adjusts its production so as to move towards equilibrium.

The resource owner has fixed quantities of resources with him which lie can place in employment. He is confronted with given alternatives of employment, with given resource price offers. He makes his equilibrium adjustment on the basis of given data.

An industry also tends towards equilibrium when firms move out of it so as to avoid losses which they may incur if they remain in it or when new firms enter the industry (if entry is free and possible) to reap the unusually high profits that are expected to be reaped. Changes in the given data facing economic units and industries change the position of equilibrium towards which each is tending, and thus cause movements towards the new positions.

According to George J. Stigler, a partial equilibrium is one which is based only on a restricted range of data. A standard example is the determination of price of a single product, the prices of all other products being held fixed during the analysis.

Marshall explained the partial-equilibrium method thus:

“The forces to be dealt with are, however, so numerous that it is best to take a few at a lime and to work out a number of partial solutions as auxiliaries to our main study. Thus, we begin by isolating the primary relations of supply, demand and price in regard to a particular commodity. We reduce to inaction all other forces by the phase ‘other things being equal’. We do not suppose that they are inert, but for the time being we ignore their activity. This scientific device is a great deal older than science; it is the method by which consciously or unconsciously, sensible men dealt from time immemorial with every difficult problem of ordinary life.”

Importance of Particular Equilibrium Analysis:

Particular equilibrium analysis is especially suited to two types of problems.

First, those problems which are confined to an industry or a sector of the economy and which do not produce any disturbances in the rest of the economy. For example, if the workers of a small toy-manufacturing firm go on strike and if they are fairly distributed in different residential areas of the city, their strike will not produce any disturbance anywhere else but in the firm and its workers.

Particular equilibrium analysis can easily be used to give answers to most of the economic problems emanating from the strike.

Second, it can be used to analyse the immediate or primary effects of economic disturbance of any type. For example, if the Government of India chalks out a programme of railway wagon and machinery exports to the U.S.S.R., particular equilibrium analysis can be helpful in analysing the first-order effects on the iron and steel industry of India—the effect on steel prices, its output, its profits, wages and employment in it. Of course, the effect of such a programme will by no means remain limited to iron and steel industry alone.

Limitations of Particular Equilibrium Analysis:

The limitations of particular equilibrium analysis are obvious.

Firstly, it is based on the assumption that an economic disturbance in a particular industry has only located effects. In reality, such cases are few and far between.

Secondly, particular equilibrium analysis is easy to follow and use. In Marshall’s view, particular equilibrium gives us simpler propositions and simpler analysis. He was sensitively aware of the limitations of the human mind.

In his view, the best we can do is to examine a commodity from the angle of such variables as price, cost and quantities. We cannot easily examine every aspect, every repercussion. He, therefore, applied this mind mainly to the analysis of the equilibrium of consumer, a firm and an industry.