Economic Equilibrium

Definition

In economics, economic equilibrium is a state where economic forces such as supply and demand are balanced and in the absence of external influences the values of economic variables will not change. For example, in the standard textbook model of perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal. Market equilibrium in this case refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes, and the quantity is called “competitive quantity” or market clearing quantity. However, the concept of equilibrium in economics also applies to imperfectly competitive markets, where it takes the form of a Nash equilibrium.

Economic Equilibrium

What is ‘Economic Equilibrium ‘

Economic equilibrium is a condition or state in which economic forces are balanced. These economic variables remain unchanged from their equilibrium values in the absence of external influences. Economic equilibrium may also be defined as the point at which supply equals demand for a product, with the equilibrium price existing where the hypothetical supply and demand curves intersect.

States of Economic Equilibrium

A state of economic equilibrium can be static or dynamic. Static equilibrium remains unchanged over time, while dynamic equilibrium is held stable by equal but opposing forces. Additionally, equilibrium may exist simultaneously in a single market or multiple markets.

Pricing and Economic Equilibrium

In regards to product pricing, equilibrium exists when the price for a product reaches a point at which the demand for the product at that price equals the level of production or the associated current supply. This point does not suggest that all who may want the product have the ability to purchase it. Instead, it is the point at which all those who would like the product, and can afford to purchase the item, have the opportunity to do so.

Disruptions to Economic Equilibrium

The balanced state of economic equilibrium can be disrupted by exogenous factors, such as a change in consumer preferences. This can lead to a drop in demand and, consequently, a condition of oversupply in the market. In this case, a temporary state of disequilibrium will prevail until a new equilibrium is identified.

Economic Equilibrium

Definition