Walrus Law: A law that suggests that the existence of excess supply in one market must be matched by excess

demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walrus' Law asserts that the examined market is also in equilibrium. Keynesian economics, by contrast, assumes that it is possible for just one market to be out of balance without a "matching" imbalance elsewhere Walrus' Law hinges on the mathematical notion that excess market demands or, conversely, excess market supplies must sum to zero. That is, XD = XS = 0. A market for a particular commodity is in equilibrium if, at the current price of the commodity, 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 500 pounds of cherries per week at $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 equilibrium. Not only must the market for cherries clear, but so too must all markets for all commodities e.g. apples, automobiles, etc. and for all resources e.g. labor and economic capital and for all financial assets e.g. including stocks, bonds, and money. Walras' Law implies that the sum of excess demands across all markets must equal zero, whether or not the economy is in a general equilibrium. This implies that if positive excess demand exists in one market, negative excess demand must exist in some other market. Thus, if all markets but one are in equilibrium, then that last market must also be in equilibrium.

Walras Identity Imagine an economy in which there are n commodities (the number of commodities in most macro models is equal to five: goods and services, labour, bonds, money and foreign exchange). Now, whether or not prevailing market prices are such as to equate demand with supply for each commodity, the money value of all commodities which an individual transactor (i.e. a household, a firm, or the government) plans to buy in any period must be equal to the money value of all commodities offered for sale by that transactor at the same time. For example, if an individual plans to purchase 200 dollars worth of commodities. let us say, 50 commodities at 2 dollars per commodity and 2 bonds at 50 dollars per bond, then, simultaneously, he or she must also plan to sell commodities to the value of 200 dollars for example, 50 hours of labour at 4 dollars per hour.

Moving from the particular to the general, the total money value of what the j'th individual transactor plans to purchase can be written symbolically as:

where P1, P2. . . Pn are the prices of the n commodities, and D1j, D2j . . . Dnj are the quantities of those commodities that the j'th individual plans to purchase. Similarly, the total money value of what the j'th individual plans to sell can be written symbolically as

Where S1j, S2j, . . . Snj are the quantities of the n commodities that the j'th individual plans to sell. Since the money value of all the commodities that the j'th individual plans to buy must always be equal to the money value of all the commodities that individual plans to sell, we may write for a single intransactor:

(1) This condition is written as an identity (an identity is a proposition which is always true, usually because of the way we have defined things) since we have assumed that no individual transactor in our model will be so misguided as to suppose that he or she can acquire something for nothing. This being so, (1) is, in effect, a statement of the budgetary constraint under which individuals formulate their purchase and sales plans. Granted that each individual's planned market transactions satisfy condition (1), it follows as a matter of simple arithmetic that the aggregate money value of the quantities demanded by all individuals must be equal to the aggregate money value of the quantities offered for sale

by all individuals. We can see this by summing condition (1) over all (m) individual transactors to obtain:

Factoring out the price variables from each side of this expression yields:

However, the expression in parentheses on the left-hand side is simply the total market demand for the i'th commodity, since it is the sum of the individual transactors demands for that commodity. We will write this total market demand for the i'th commodity as Di. Similarly, the expression in parentheses on the right-hand side is simply the total market supply of the i'th commodity, since it is the sum of the individual transactors' supplies of that commodity. We will write the total market supply of the i'th commodity as Si. Thus, we arrive at the conclusion that:

(2) This proposition is known as Walras Identity. It states that the money value of all planned market purchases when added together is identically equal to the aggregate money value of all planned market sales. Limitations: Markets are PC but in reality there are more than forms of competitors like monopoly, oligopoly, etc. Market moves from disequilibrium to equilibrium. Markets may or may be in equilibrium.