Equilibrium

Definition

Equilibrium refers to a state in which supply and demand in a market are balanced, resulting in stable prices. It is the point where the quantity of goods supplied equals the quantity of goods demanded, leading to no inherent forces causing change in price or output. Understanding equilibrium is crucial in analyzing how markets function and how various economic factors interact within the framework of marginal utility and production.

5 Must Know Facts For Your Next Test

1. Equilibrium is achieved at the intersection of the supply and demand curves on a graph, which represents price and quantity.
2. In a state of equilibrium, any changes in supply or demand will lead to temporary disequilibrium until a new equilibrium is reached.
3. Equilibrium can shift due to external factors such as changes in consumer preferences, technology, or resource availability.
4. The concept of equilibrium was foundational for the marginal revolution, where economists like Jevons, Menger, and Walras introduced it as a way to understand utility and choice.
5. Different types of equilibrium exist, including short-run equilibrium, long-run equilibrium, and general equilibrium, each having different implications for economic analysis.

Review Questions

• How does the concept of equilibrium relate to the ideas presented by Jevons, Menger, and Walras?
  • The concept of equilibrium is central to the theories presented by Jevons, Menger, and Walras during the marginal revolution. Jevons emphasized the importance of marginal utility in determining individual choices that lead to market equilibrium. Menger focused on subjective value and how it influences supply and demand interactions. Walras contributed through his formulation of general equilibrium theory, showing how multiple markets can reach equilibrium simultaneously through interdependence.
• Discuss how shifts in supply and demand affect market equilibrium and provide examples.
  • Shifts in supply and demand directly impact market equilibrium by altering the intersection point of the supply and demand curves. For instance, if there is an increase in consumer preference for electric cars (demand shift right), the equilibrium price will rise until producers can catch up with demand. Conversely, if a new technology reduces production costs for electric cars (supply shift right), the equilibrium price will decrease. These shifts demonstrate how dynamic market conditions can influence stability.
• Evaluate the broader implications of achieving equilibrium in markets for economic efficiency and welfare.
  • Achieving equilibrium in markets has significant implications for economic efficiency and welfare. When markets reach equilibrium, resources are allocated optimally, maximizing total surplus—the sum of consumer and producer surplus. This state indicates that goods are being produced at their most valued use, reflecting consumer preferences accurately. However, persistent deviations from equilibrium can lead to inefficiencies, creating deadweight loss and potentially harming overall economic welfare. Analyzing these dynamics allows economists to assess policy impacts on market performance.

Related terms

Market Equilibrium: The condition where market supply equals market demand, leading to a stable market price.

Price Elasticity: A measure of how much the quantity demanded or supplied of a good responds to a change in price.

Pareto Efficiency: A situation in which resources are allocated in the most efficient manner, meaning no one can be made better off without making someone else worse off.