partial equilibrium



  • Equality of supply and demand in only a subset of an economy's markets - usually just one - taking variables from other markets as given. Partial equilibrium models are appropriate for products that constitute only a negligibly small part of the economy. They are used routinely (not always appropriately) for analysis of trade policies in single industries. Contrasts with general equilibrium.

Health Economics

  • (written as Partial Equilibrium)

    The 'partial' element in this term refers to a theoretical ploy used in economics to simplify analysis by focusing on the principal relationships and setting aside feedback effects and other effects deemed to be non-central, even at the price of some compromise in logical coherency. ' Equilibrium ' refers to the solution of a set of simultaneous equations, some of which describe behavioural reactions to parameter changes. Thus, a simple demand and supply analysis might posit linear demand and supply functions, and an equilibrium condition:

    D = a - bP

    S = c + dP

    D = S

    The equilibrium price is thus (a - c)/( d + b). All else is held constant (ceteris paribus) notwithstanding the facts that a change in price will affect the purchasing power of money income (so real income is strictly speaking not constant and the good may have a positive or negative income-elasticity), or that a change in S might affect the demand for labour and hence a person's income (so money income is not constant either). Absence of side-effects such as these can be regarded as stipulations for the circumstances under which the theory in question is applicable (i.e. when the impact of a price change on income is likely to be minute because, say, the good whose demand is being investigated occupies a trivial fraction of an individual's expenditure). When this is not sustainable a general equilibrium approach must be taken, or at least one that explicitly takes account of the consequential effects of any initial disturbance to equilibrium.