Definitions

A market for a particular commodity is in equilibrium if, at the current prices of all commodities, the quantity of the commodity demanded by potential buyers equals the quantity supplied by potential sellers. For example, suppose the current market price of cherries is $1 per pound. If all cherry farmers summed together are willing to sell a total of !! pounds of cherries per week at $1 per pound, and if all potential customers summed together are willing to buy !! pounds of cherries in total per week when faced with a price of $1 per pound, then the market for cherries is in equilibrium because neither shortages nor surpluses of cherries exist. An economy is in general equilibrium if e"ery market in the economy is in equilibrium. #ot only must the market for cherries clear, but so too must all markets for all commodities $apples, automobiles, etc.% and for all resources $labor and economic capital% and for all financial assets, including stocks, bonds, and money. &'xcess demand& refers to a situation in which a market is not in equilibrium at a specific price because the number of units of an item demanded exceeds the quantity of that item supplied at that specific price. 'xcess demand yields an economic shortage. A negati"e excess demand is synonymous with an excess supply, in which case there will be an economic surplus of the good or resource. &'xcess demand& may be used more generally to refer to the algebraic "alue of quantity demanded minus quantity supplied, whether positi"e or negati"e.

Walras' Law
(alras& )aw implies that the sum of the "alues of excess demands across all markets must equal *ero, whether or not the economy is in a general equilibrium. +his implies that if positi"e excess demand exists in one market, negati"e excess demand must exist in some other market. +hus, if all markets but one are in equilibrium, then that last market must also be in equilibrium. +his last implication is often applied in formal general equilibrium models. In particular, to characteri*e general equilibrium in a model with m agents and n commodities, a modeler may impose market clearing for n , 1 commodities and -drop the n,th market,clearing condition.- In this case, the modeler should include the budget constraints of all m agents $with equality%. Imposing the budget constraints for all m agents ensures that (alras& )aw holds, rendering the n,th market,clearing condition redundant. In the farmer example, suppose that the only commodities in the economy are cherries and apples, and that no other markets exist. If excess demand for cherries is *ero, then by (alras& )aw, excess demand for apples is also *ero. If there is excess demand for cherries, then there will be a surplus $excess supply, or negati"e excess demand% for apples. and the market "alue of the excess demand for cherries will equal the market "alue of the excess supply of apples. (alras& )aw is ensured if e"ery agent&s budget constraint holds with equality. An agent&s budget constraint is an equation stating that the total market "alue of the agent&s planned expenditures, including sa"ing for future consumption, must be less than or equal to the total market "alue of the agent&s expected re"enue, including sales of financial assets such as bonds or money. (hen an agent&s budget constraint holds with equality, the agent neither plans to acquire goods for free $e.g., by stealing%, nor does the agent plan to gi"e away any goods for free. If e"ery agent&s budget constraint

holds with equality, then the total market "alue of all agents& planned outlays for allcommodities $including sa"ing, which represents future purchases% must equal the total market "alue of all agents& planned sales of all commodities and assets. It follows that the market "alue of total "alue of excess demand in the economy must be *ero, which is an the statement of (alras& )aw. (alras& )aw implies that if there are n markets and n,1 of these are in equilibrium then the last market must also be in equilibrium, a property which is essential in the proof of the existence of equilibrium.