Production, consumption, and general equilibrium with physical constraints

This paper analyzes the consequences of integrating the conservation laws of mass and energy into the microeconomic models of production, consumption, and general equilibrium. We show that abstract models and especially general equilibrium theory are consistent with these physical constraints, but most applied and environmental economic models are not. We analyze the consequences of physical conservation laws for substitution possibilities and show that these constraints limit the number of independent substitution processes but not the value of the substitution elasticities. Finally, we propose a method for integrating physical constraints into static microeconomic models with a minimum of changes.