Mechanism for attaining walrasian equilibrium

We have shown above that under certain conditions, an equilibrium price, can be found, for which demand is equal to supply. However, the underlying process through which the initial price P moves to P* is seen through various mechanisms.

1) Tatonnemant Process: A fictitious auctioneer is put in charge with calling out a price vector and agents respond by providing information about their demands an supplies. Only when the auctioneer calls that price vector for which the quantity demanded is identical to that which is supplied, trading is permitted to take place.

2) Provisional Contract: There could be recontracting in which buyers and sellers would enter into provisional contract before actual exchange goods takes place. Unless the agreed price vector is equilibrium one, provisional contracts remain unimplemented.

3) Central Planning: A central authority is established to whom the consumers report their excess demands at all prices. You have to remember the planning processes of socialist economies to appreciate the notion of arriving at the equilibrium price. This was highlighted by Oskar Lange and Abba P. Lerner when they said that a socialist system can operate as efficiently as a capitalist one.