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Concept
Walras's law
Summary
Walras's law is a principle in general equilibrium theory asserting that budget constraints imply that the values of excess demand (or, conversely, excess market supplies) must sum to zero regardless of whether the prices are general equilibrium prices. That is:
where is the price of good j and and are the demand and supply respectively of good j.
Walras's law is named after the economist Léon Walras of the University of Lausanne who formulated the concept in his Elements of Pure Economics of 1874. Although the concept was expressed earlier but in a less mathematically rigorous fashion by John Stuart Mill in his Essays on Some Unsettled Questions of Political Economy (1844), Walras noted the mathematically equivalent proposition that when considering any particular market, if all other markets in an economy are in equilibrium, then that specific market must also be in equilibrium. The term "Walras's law" was coined by Oskar Lange to distinguish it from Say's law. Some economic theorists also use the term to refer to the weaker proposition that the total value of excess demands cannot exceed the total value of excess supplies.
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, and if all potential customers summed together are willing to buy 500 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 every market in the economy is in partial equilibrium. Not only must the market for cherries clear, but so too must all markets for all commodities (apples, automobiles, etc.
Official source
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