What is a partial balance?

Partial balance is an economic theory used to analyze very small markets or individual products. This theory requires economists to ignore all markets outside the studied, and assume that changes in this particular market will not have any effect outside this market and vice versa. The theory of partial balance provides a useful model for research and analysis, but in the real world scenarios is generally not manifested. For wider market studies as a whole, economists rely on a wider concept of general balance that examines how changes in each market event affect related markets.

The first general balance models were developed by French economist Leon Walras during the 70th century. Only in the 1920s and 1930s economists tried to study markets isolated by partial equilibrium models. Frenchman Antoine Cournot and Englishman Alfred Marshall are generally attributed to the first economists to publish the theories of a part of the equilibrium analysis.

E says it is in balance when demand meets the supply. This happens when manufacturers find a balance price point for each product. Since consumers have only a limited amount of income, price changes on one product could affect how much money remains on other products, which could affect demand and supply. Partial equilibrium models ignore this concept and assume that changes on each market have no effect on other products or markets.

This theory can be applied most effectively to very small markets or products. For example, this model could be used to help a small -time bread manufacturer to determine the price point for its product by balancing supply and demand. This example corresponds to this model because it includes a very small market compared to the overall economy and also because it does not include any limited resources. In most cases he will have a small baker, which increases production or changes its prices, a small impact on other markets or on the availability of flour and other components. Using a partial equilibrium theory, the same baker could have a huge impact on his own profits by finding a price where supply and demand equals.

The theory of general balance, on the other hand, helps economists to determine the price in which supply and demand are balanced on all markets and products. This model acknowledges that most products will affect a single manufacturer's change in a large volume of other markets. For example, if a baker who supplied bread to shops across the country decided half of his production rate, the bread supply in the country may be insufficient to satisfy demand. Prices for bread would increase and consumers would have less money to spend for other goods. This could affect the prices and production levels for all types of consumer goods.