Normalisation of Prices:
See that we have one equation in two unknowns, the prices. However, since we have a pure exchange economy without money, only relative prices matter, i.e., only the price ratio is important. That means, we can "normalise" on of the prices to 1 :Remark This result also comes from the homogeneity of degree 0 of the demand functions. Remember; by definition of homogeneity of degree 0 in prices we have: ![574_Normalization of Prices and Second Market.png](https://www.expertsmind.com/CMSImages/574_Normalization%20of%20Prices%20and%20Second%20Market.png)
![2166_Normalization of Prices and Second Market1.png](https://www.expertsmind.com/CMSImages/2166_Normalization%20of%20Prices%20and%20Second%20Market1.png)
Second Market:
We solve for the other market, i.e., the market for. good 2. By Walras law, if one market clears the second also clears (if the total number of market is 2); thus using the prices computed above, we get the equilibrium demands for the market of good 2. Thus, from
![2129_Normalization of Prices and Second Market2.png](https://www.expertsmind.com/CMSImages/2129_Normalization%20of%20Prices%20and%20Second%20Market2.png)