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The general equilibrium theory is a part of the theoretical economics which explains the act of demand, supply and the prices in the whole economy with many or several interacting markets, by exploring to prove that the bundle of prices exists which would result in the total equilibrium. Thus, the general equilibrium in contradiction to the partial equilibrium, that only evaluates the single markets. Like as with the all models, it is the consideration from any real economy, this is proposed as an useful model, both by acknowledging the actual prices as the deviations from the equilibrium and by acknowledging the equilibrium prices as the long-term prices.

The general equilibrium theory studies both the economics by using the model of the equilibrium pricing and follows to decide in what circumstances the assuming of the general equilibrium would hold.

Overview of the general equilibrium theory:

The general equilibrium tries to provide the understanding of the complete economy by using some bottom up approach, which starts with the agents and individual markets. Microeconomics basically focus on the top down approach, where an analysis starts with some larger aggregates. Thus, the theory of general equilibrium has been traditionally classified as an important part of the microeconomics. The difference is not so clear, as majority of the modern economics has influenced the foundations of microeconomics. The general equilibrium models in the tradition of microeconomics has involve typically a large group of the various good markets. These models commonly complex and need computers to assist with the numerical solutions.

The modern concept of the general equilibrium in microeconomics

The modern concept of the general equilibrium is offered by a model which was developed jointly by Gerard Debreu, Lionel W. McKenzie and Kenneth Arrow in 1950s. Often three essential interpretations of the game theory is described.

Firstly, suppose the commodities are analyzed by that location where the commodities are delivered.

Secondly, suppose the commodities are analyzed by the time when those are delivered. It is, assume all the markets equilibrate at any primary instant of the time. The assistants in this model sell and purchase contracts.

Thirdly, suppose the contracts designate the states of the nature that influence whether any commodity is to be delivered or not.

All the three analysis can be associated. Some recent work of the general equilibrium has also explored the implications of the incorporate market, which is to say an intertemporal economy with the uncertainty, where the sufficiently detailed contracts do not exist which let the agents to allocate fully the resources and consumption through time. When it is shown that these kind of economics would still have the equilibrium, whose outcome may not any longer be Pareto optimal.