General Equilibrium Analysis

General equilibrium analysis explains how changes in one market affect interconnected markets, leading to adjustments until equilibrium is reached across all related markets.

Consider the example of the markets for movie tickets and online streaming services.

Suppose a tax is introduced on movie tickets, increasing their cost. This shifts the supply curve upward, raising prices and reducing ticket sales. 

As movie ticket prices rise, more consumers turn to streaming, shifting the demand curve rightward. This increase in demand, driven by new users, raises streaming subscription prices.

But the interplay doesn’t stop here. As streaming prices rise, some consumers reconsider their choices, finding movies relatively more appealing despite the tax. This feedback slightly increases movie ticket demand, partially offsetting the initial decline in quantity demanded.

This back-and-forth adjustment continues until both markets stabilize at a new equilibrium. 

This simplified model highlights how interconnected markets adjust; in reality,  general equilibrium models are even more complex, potentially influencing many other markets as changes ripple through the economy.