Walrasian Market

Published Oct 26, 2023

Definition of Walrasian Market

A Walrasian market refers to a perfectly competitive market where prices adjust to equate supply and demand. In a Walrasian market, there are many buyers and sellers, and there are no barriers to entry or exit. Prices are determined through the interaction of supply and demand, and the market reaches equilibrium where the quantity demanded equals the quantity supplied at a specific price.

Example

To understand a Walrasian market, let’s consider the market for apples. In this hypothetical market, there are many apple farmers (sellers) and many apple consumers (buyers). The price of apples initially starts at $1 per pound. At this price, consumers demand 100 pounds of apples, while farmers are willing to supply 80 pounds. There is an excess demand of 20 pounds of apples.

In a Walrasian market, prices are flexible, so if there is excess demand, prices will rise. With the price increase to $1.25 per pound, consumers may reduce their demand to 90 pounds, while farmers increase their supply to 90 pounds. This adjustment continues until the price reaches $1.10 per pound, at which point the quantity demanded and the quantity supplied both equal 85 pounds. The market is now in equilibrium, and there is no longer excess demand or supply.

Why Walrasian Market Matters

Understanding the concept of a Walrasian market is crucial for economists and policymakers. The assumption of perfect competition and price flexibility allows for the efficient allocation of resources. In a Walrasian market, prices serve as signals for buyers and sellers, indicating scarcity or abundance of a good. This leads to an efficient allocation of resources, production at the lowest possible cost, and maximization of economic welfare.

However, in real-world markets, there are often barriers to entry, monopolistic behavior, and imperfect information, making it challenging to achieve the ideal Walrasian market conditions. Nonetheless, striving for competition and price flexibility can help improve market efficiency and overall economic performance.