Walras’ Law

Published Oct 26, 2023

Definition of Walras’ Law

Walras’ Law, named after the French economist Léon Walras, states that in a general equilibrium model, the sum of excess demands across all markets must be equal to zero. This means that if there is an excess demand for one good or service, there must be an excess supply of another good or service.

Example

To better understand Walras’ Law, let’s consider a simple economy with two goods: apples and oranges. In this economy, there are two individuals, Adam and Eve, who are the only buyers and sellers.

Initially, Adam has a higher demand for apples than there are apples available in the market. This creates an excess demand for apples. On the other hand, Eve has a higher supply of oranges than what is demanded, resulting in an excess supply of oranges.

According to Walras’ Law, the excess demand for apples is exactly offset by the excess supply of oranges. In other words, the total excess demand across all markets is zero. This is an essential condition for the economy to be in equilibrium.

Why Walras’ Law Matters

Walras’ Law is a fundamental concept in general equilibrium theory, which studies the interdependence and interactions between multiple markets in an economy. It is crucial for understanding how markets adjust and reach equilibrium.

By recognizing that excess demands and supplies must balance out, policymakers and economists can better analyze and predict the effects of changes in one market on other markets. It helps to identify potential disequilibria and the need for adjustments in prices, quantities, or policies to restore equilibrium.

Overall, Walras’ Law provides important insights into the functioning of markets and serves as a building block for more advanced economic analyses.