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The Conflict Between General Equilibrium and the Marshallian Cross

Author

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  • Ismail Saglam

    () (Department of Economics, TOBB University of Economics and Technology)

  • Asad Zaman

    () (International Institute of Islamic Economics, International Islamic University)

Abstract

There is a conflict in the mechanism for price determination used in a Marshallian partial equilibrium supply and demand framework and the Walrasian general equilibrium framework. It is generally thought that partial equilibrium is a simplified approximation to the complexities of the general model. The goal of this paper is to show that there is a strong conflict between the two models - intuitions and heuristics suggested by partial equilibrium are contradicted by extensions to the general equilibrium case. We review the literature on the conflict and also provide a very simple model where partial equilibrium analysis fails completely. Several intuitively plausible remedies fail to restore partial equilibrium results. We show that Marshallian analysis can be made to work only under rather stringent conditions requiring joint production with low fixed costs and decreasing returns resulting in identical production proportions by all producers.

Suggested Citation

  • Ismail Saglam & Asad Zaman, 2012. "The Conflict Between General Equilibrium and the Marshallian Cross," Koç University-TUSIAD Economic Research Forum Working Papers 1219, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1219
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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1219.pdf
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    References listed on IDEAS

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    1. Steedman, Ian, 1988. "Sraffian Interdependence and Partial Equilibrium Analysis," Cambridge Journal of Economics, Oxford University Press, vol. 12(1), pages 85-95, March.
    2. A. Cohen & G. Harcourt., 2009. "Whatever Happened to the Cambridge Capital Theory Controversies?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 8.
    3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    4. Kane, John, 1997. "Myth and measurement: The new economics of the minimum wage : David Card and Alan B. Krueger, New Jersey: Princeton University Press, 1995, x + 422," International Review of Economics & Finance, Elsevier, vol. 6(2), pages 219-222.
    5. Frederic Lee & Steve Keen, 2004. "The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory," Review of Social Economy, Taylor & Francis Journals, vol. 62(2), pages 169-199.
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    Cited by:

    1. Lima, Gerson P., 2015. "Supply and Demand Is Not a Neoclassical Concern," MPRA Paper 63135, University Library of Munich, Germany.
    2. Mehmet Karacuka & Asad Zaman, 2012. "The empirical evidence against neoclassical utility theory: a review of the literature," International Journal of Pluralism and Economics Education, Inderscience Enterprises Ltd, vol. 3(4), pages 366-414.

    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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