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What Is a Walrasian Market?
Let me explain what a Walrasian market is. It's an economic model where we collect orders into batches of buys and sells, then analyze them to find a clearing price that sets the market price. You might also hear it called a call market.
Key Takeaways
In a Walrasian market, we batch orders and analyze them to determine a clearing price that sets the market price. Leon Walras developed this to show that general equilibrium—equal supply and demand in all markets at once—can exist. Buyers and sellers don't have much control over final prices here, unlike in auction markets where market forces play a bigger role. We group buy and sell orders and execute them at specific times, not continuously one by one. The NYSE uses something similar before the opening bell to set opening prices.
Understanding a Walrasian Market
Leon Walras came up with the Walrasian market in response to Antoine Cournot's idea that general equilibrium wasn't possible. We use this model in financial markets today. For instance, the NYSE does something like it before the opening bell: a specialist reviews all orders for a security and picks the price that clears the most trades. Back until 1871, all NYSE trading worked this way.
In this setup, we group buy and sell orders and execute them at set times, not one after another. A Walrasian auctioneer collects order prices and sets the final price, assuming perfect information about all orders.
Walrasian Market vs. Auction Market
A Walrasian market isn't like an auction market, where buyers and sellers trade continuously. In auction markets, market forces directly set the final price, but in Walrasian ones, buyers and sellers don't get the final say on trade prices.
It's important to note that the U.S. Treasury auctions Treasury securities to fund the government, which is more of an auction market approach. In those, buyers bid competitively, sellers offer competitively, and trades happen at prices matching the highest buy and lowest sell. Walrasian markets work better in scenarios with few buyers, sellers, or shares.
Example of a Walrasian Market
Take this example with buy and sell orders for Company A’s stock. We have buys like 1,000 shares at $5.25, 500 at $5.00, 700 at $5.50, and 500 at $5.25. Sells match: 1,000 at $5.25, 500 at $5.00, 700 at $5.50, and 500 at $5.25.
In a Walrasian market, we group these buys and executes at a price and time that clears most orders. Here, $5.25 might be that price, even if some wanted $5.00, because it clears the most transactions. That's the price the exchange analyst uses.
What Is Walras’s Law?
Walras's Law is an economic theory saying excess supply in one market matches excess demand in another, so they cancel out. It means if all markets are in equilibrium, each specific market must be too.
What Is Walras’s General Equilibrium Theory?
This theory shows that all markets tend toward equilibrium in the long run, not just partial equilibrium in some markets. The point isn't that they all reach it perfectly, but that they move toward it.
What Is the Classical Theory of Money?
The classical theory says the money a household needs is proportional to the value of goods it demands. If you're buying more valuable stuff, you keep more cash on hand—that's the propensity to hold money.
How Do You Solve for Walrasian Equilibrium?
To find the Walrasian equilibrium, follow four steps. First, calculate feasible outcomes. Second, solve for the optimum. Third, find prices that support the optimal production plan. Fourth, explain why consumer demand equals supply at those prices.
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