Nonclearing Markets and Imperfect Competition

Abstract This chapter characterizes the Walrasian model and defines how it has to be generalized to deal with nonclearing markets and imperfect competition. It simply describes microfoundations of the more general theories already delineated. It also provides a simple macroeconomic example of price and quantity determination under assumptions on price and wage formation using: (1) Walrasian equilibrium, (2) rigid prices and wages, and (3) imperfect competition in the goods and labor markets. Lastly, the chapter reveals that the response to stochastic shocks and the resulting correlations between various variables depend in a fundamental manner on the assumptions on price and wage rigidities.