Partial Equilibrium Analysis

Abstract

With the publication of the first edition of his Principles of Economics in 1890, Alfred Marshall developed partial equilibrium analysis as a method for turning economic theory into a form that could be used to formulate policy and aid in the analysis of actual problems. He wanted economics to be “an engine for the discovery of concrete truth” (Hausman 1992, p. 152). In partial equilibrium each market or section of the economy is considered as a separate entity, and so its interdependence with other markets is not considered. This often is described as ceteris paribus, that is, other things do not change. To bring some order and understanding to an extremely complex world in which everything affects everything else, partial equilibrium concentrates on key relations, holding the rest constant (Hausman 1992). It is not that these factors are believed to be unchanging but that they are held in the ceteris paribus “pound.” As Marshall stated in 1922:

The forces to be dealt with are however so numerous, that it is best to take a few at a time: and to work out a number of partial solutions.… Thus we begin by isolating the primary relations of supply, demand and price in regards to a particular commodity. We reduce to inaction all other forces by the phrase “other things being equal”: we do not suppose that they are inert, but for the time being we ignore their activity.… In the second stage more forces are released from the hypothetical slumber that had been imposed on them. (Marshall 1922, pp. xiv–xv)