Write down the behavioural assumptions used in Marshallian and Walrasian approaches of market stability. Show that these two approaches become conflicting when both the demand and supply curves are positively sloped.

Marshallian Approach: Partial Equilibrium and Psychological Laws

The Marshallian approach, rooted in partial equilibrium analysis, assumes that the price of a commodity is determined by the interaction of demand and supply in a specific market, holding other factors constant. Key behavioural assumptions include:

• Rationality with Psychological Considerations: Consumers are rational but influenced by psychological factors like habit, custom, and diminishing marginal utility.
• Demand as a Function of Price: Demand is inversely related to price (law of demand), reflecting diminishing marginal utility.
• Supply as a Function of Price: Supply is directly related to price, driven by increasing costs of production.
• Time as a Crucial Element: Marshall distinguished between market period, short run, and long run, acknowledging that supply elasticity varies with time.
• Circular Causation: Demand and supply mutually determine each other, creating a circular causal relationship.

Marshall used the concept of quasi-rents to explain short-run supply decisions. He believed that market forces would eventually lead to equilibrium where demand equals supply, ensuring market stability.

Walrasian Approach: General Equilibrium and Utility Maximization

The Walrasian approach, in contrast, adopts a general equilibrium perspective, analyzing the entire economy simultaneously. Its core behavioural assumptions are:

• Perfect Rationality: Individuals (consumers and producers) are perfectly rational and aim to maximize their utility and profits, respectively.
• Utility Maximization: Consumers allocate their income to maximize utility, subject to budget constraints.
• Profit Maximization: Producers allocate resources to maximize profits, subject to production constraints.
• Interdependence of Markets: All markets are interconnected, and changes in one market affect all others.
• ‘Tâtonnement’ Process: Walras proposed a ‘tâtonnement’ (groping) process where prices adjust until all markets clear (supply equals demand).

Walras emphasized the role of general equilibrium in achieving market stability. He believed that a unique equilibrium price vector exists, ensuring that all markets clear simultaneously. This equilibrium is achieved through the adjustment of prices, guided by the ‘tâtonnement’ process.

The Conflict with Positively Sloped Curves

The conflict between the two approaches arises when both demand and supply curves are positively sloped. This situation, while uncommon in standard economic analysis, can occur in specific contexts like Giffen goods (demand) and labour supply (supply).

Marshallian Instability: With positively sloped demand and supply curves, the intersection point is unstable. Any deviation from the equilibrium price leads to further price increases, creating a vicious cycle. The circular causation assumed by Marshall breaks down, leading to indeterminacy and potential market instability. The market fails to self-correct.

Walrasian Indeterminacy: The Walrasian ‘tâtonnement’ process also fails in this scenario. The process relies on excess demand or supply to drive price adjustments. However, with positively sloped curves, an initial excess demand leads to a price increase, which further increases demand and supply, preventing the market from reaching equilibrium. The system becomes indeterminate, meaning there is no unique equilibrium price.

Illustrative Table: Comparing the Approaches

Feature	Marshallian Approach	Walrasian Approach
Scope of Analysis	Partial Equilibrium	General Equilibrium
Rationality Assumption	Bounded Rationality (Psychological Factors)	Perfect Rationality
Price Determination	Interaction of Demand & Supply	Simultaneous Market Clearing
Stability with Positive Slopes	Unstable, Indeterminacy	Indeterminate