Walras’ Law in Economic Analysis

Walras’ Law of Markets, defined by Léon Walras (1834-1910), which is a part of his theory of General Equilibrium, is particularly significant to macroeconomic analysis because it allows one to make conclusions about three sectors of an economy by analyzing only two (Ekelund & Hébert, 1990). For example, when zero excess demand exists (i.e., Walrasian Equilibrium) between any two of the consumption/investment market, the money market and the bond market, the third market is in equilibrium also.

Application of Walras’ Law to the entire economic system is an extension of the economic activity of individual consumers. Fundamentally, demand by consumers is a mirrored reflection of supply by other consumers. Whereas, each consumer trades to achieve an optimal set of holdings within their budget constraints, the “excess demand for any good depends upon the sum of the excess demands for other goods” (Ekelund & Hébert, 1990, p. 438). In other words, an individual must have excess supplies of goods in equivalent values to those goods demanded.

The zero-sum exchange that is present in the condition of general equilibrium in a market applies to both the individual and the economy. Through Walras’ Law, Walras’ General Equilibrium Theory demonstrates the relationships and interconnections between markets in a competitive, idealized economy as well as relationships between the demand functions of individual consumers.

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1990). A history of economic theory and method (3rd ed.). New York: McGraw Hill.