CandleFocus Glossary Editor
Equilibrium is an economic concept that defines the concept of a balanced state of supply and demand in a market. The term equilibrium is derived from the Latin word “aequilibrium” which means balance or equal weight.
A market is said to be in equilibrium when the quantity of a good supplied and the quantity demanded by consumers meet. In other words, equilibrium in a market exists when there is an equal balance between the quantity of a good that firms are willing to produce and the quantity consumers are willing to demand. The price at which equilibrium is reached is referred to as the equilibrium price. At this price, producers are willing to make the amount of a good that consumers are willing to purchase.
The behavior of agents in the market should be consistent - everyone should be acting to maximize their profit and receive the best value for their investments. The pricing, quantity and other conditions in the market must all favor the participants for the market to remain in equilibrium. Additionally, there should be no incentives for agents to change their behavior in order to gain an advantage.
As such, equilibrium is often considered to be a dynamic concept, as the conditions in the market may change over time, leading the market to reach different states of equilibrium. For example, with an increase or decrease in the demand for a good, the equilibrium price and quantity of the good may change significantly. Disequilibrium is the opposite of equilibrium and it is characterized by changes in conditions that affect market equilibrium and lead it away from the point of balance.
In reality however, markets are rarely in perfect equilibrium and prices tend to fluctuate. External economic conditions such as scarcity of resources, changing demand and other economic shocks can cause disturbances in the balance of the market, resulting in disequilibrium and instability. As such, a market can reach different states of equilibrium on a short-term basis due to large prices changes, but the price tends to return to the equilibrium value in the long-run.
In summary, equilibrium is an economic concept that defines the balance of supply and demand in a market. A market is said to have reached equilibrium when the supply of goods matches demand, and the market demonstrates three key characteristics - consistent behavior, lack of incentives to change behavior, and a dynamic process governing equilibrium outcomes. Finally, equilibria tends to be ambiguous and volatile, due to changing conditions and external economic shocks.
A market is said to be in equilibrium when the quantity of a good supplied and the quantity demanded by consumers meet. In other words, equilibrium in a market exists when there is an equal balance between the quantity of a good that firms are willing to produce and the quantity consumers are willing to demand. The price at which equilibrium is reached is referred to as the equilibrium price. At this price, producers are willing to make the amount of a good that consumers are willing to purchase.
The behavior of agents in the market should be consistent - everyone should be acting to maximize their profit and receive the best value for their investments. The pricing, quantity and other conditions in the market must all favor the participants for the market to remain in equilibrium. Additionally, there should be no incentives for agents to change their behavior in order to gain an advantage.
As such, equilibrium is often considered to be a dynamic concept, as the conditions in the market may change over time, leading the market to reach different states of equilibrium. For example, with an increase or decrease in the demand for a good, the equilibrium price and quantity of the good may change significantly. Disequilibrium is the opposite of equilibrium and it is characterized by changes in conditions that affect market equilibrium and lead it away from the point of balance.
In reality however, markets are rarely in perfect equilibrium and prices tend to fluctuate. External economic conditions such as scarcity of resources, changing demand and other economic shocks can cause disturbances in the balance of the market, resulting in disequilibrium and instability. As such, a market can reach different states of equilibrium on a short-term basis due to large prices changes, but the price tends to return to the equilibrium value in the long-run.
In summary, equilibrium is an economic concept that defines the balance of supply and demand in a market. A market is said to have reached equilibrium when the supply of goods matches demand, and the market demonstrates three key characteristics - consistent behavior, lack of incentives to change behavior, and a dynamic process governing equilibrium outcomes. Finally, equilibria tends to be ambiguous and volatile, due to changing conditions and external economic shocks.