Partial Equilibrium
What is Partial Equilibrium?
Partial equilibrium is the analysis of a single market on its own, holding prices and conditions in all other markets constant.
Partial equilibrium is the standard supply and demand diagram: one market, one price, everything outside the diagram frozen. The ceteris paribus assumption is doing the work, since income, other prices, and technology are all held still while the market in question finds its clearing price. This is a good approximation when the market is small enough that its spillovers barely move anything else, which covers most exam questions about a tax, a price ceiling, or a shift in demand. It breaks down for large markets or big shocks, where feedback from other markets changes the answer. General equilibrium is the alternative that lets every price move at once, at the cost of a much larger model.
Partial Equilibrium: a worked example
Take a single market with demand Qd = 100 - 2P and supply Qs = -20 + 2P. Setting them equal gives 100 - 2P = -20 + 2P, so 4P = 120, P = 30 and Q = 40. Add a $10 per-unit tax on sellers and supply becomes Qs = -40 + 2P, which gives 4P = 140, P = 35 paid by buyers, 25 received by sellers, and Q = 30. That whole answer is partial equilibrium: it never asks what the tax does to workers in this industry, to substitute goods, or to how households spend the rest of their income.
The mistake students make with partial equilibrium
A frequent error is forgetting that partial equilibrium is an assumption, not a fact, and then treating the one-market answer as the complete effect of a policy. Ceteris paribus is imposed by the analyst; the rest of the economy does not actually hold still. The habit to build is to state the assumption out loud, then ask which other market is large enough to matter.
Partial Equilibrium questions
Is a supply and demand graph partial equilibrium?
Yes, a standard supply and demand graph is partial equilibrium analysis, because it solves for one market's price and quantity while holding all other prices fixed. Anything you shift on that diagram (income, a substitute's price, input costs) is treated as coming from outside. The graph gives no information about what then happens in those other markets.
When is partial equilibrium a bad approximation?
Partial equilibrium is a bad approximation when the market is large relative to the economy or the shock is big enough to move incomes and other prices. A tax on all energy, a change in the wage across a whole labor market, or a nationwide policy will all bounce back through other markets. In those cases the one-market answer can be wrong in size and sometimes even in direction.
What does ceteris paribus have to do with partial equilibrium?
Ceteris paribus, meaning all else equal, is exactly the assumption that makes partial equilibrium work. It lets you draw one market's supply and demand curves as fixed objects and change only the thing you are studying. Drop the assumption and the other curves start moving too, which is where general equilibrium begins.
This is the live Supply and Demand sandbox. Drag the curves, or open the full version.
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