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In most simple microeconomic stories of supply and demand in a market, we see a static equilibrium in a market; economic equilibrium can exist in non-market relationships and be dynamic. It is also partial equilibrium , while equilibrium may be multi-market or general.
As in most usage (say, that of chemistry), in economics equilibrium means "balance," here between supply forces and demand forces: for example, an increase in supply will disrupt the equilibrium, leading to lower prices. Eventually, a new equilibrium will be attained in most markets. Then, there will be no change in price or the amount of output bought and sold — until there is an exogenous shift in supply or demand (such as changes in technology or tastes). That is, there are no endogenous forces leading to the price or the quantity.
Not all economic equilibria are stable. For an equilbrium to be stable, a small deviation from equilibrium leads to economic forces that returns an economic sub-system toward the original equilibrium. For example, if a movement out of supply/demand equilibrium leads to an excess supply (glut) that induces price declines which return the market to a situation where the quantity demanded equals the quantity supplied. If supply and demand curves intersect more than once, then both stable and unstable equilibria are found.
There is nothing inherently good or bad about equilibrium, so that it is mistake to attach normative meaning to this concept. That is, food markets may be in equilibrium at the same time that people are starving (because they cannot afford the high equilibrium price).
In most interpretations, classical economists such as Adam Smith maintained that the free market would tend towards economic equilibriumFor the 2002 science fiction movie see Equilibrium (2002 movie Equilibrium or balance is any of a number of related phenomena in the natural and social sciences. In general, a system is said to be in a state of equilibrium if all influences on the system through the price mechanism . That is, any excess supply (market surplus or glut) will lead to price cuts, which decrease the quantity supplied (by undermining the incentive to produce and sell the product) and increase the quantity demanded (by offering consumers bargains). This automatically abolishes the glut. Similarly, in an unfettered market, any excess demand (or shortage) will lead to price increases, which lead to cuts in the quantity demanded (as customers are priced out of the market) and increases in the quantity supplied (as the incentive to produce and sell a product rises). As before, the shortage disappears. This automatic abolition of market non-clearing situations distinguishes markets from central planning schemes, which often have a difficult time getting prices right and suffer from persistent shortages of goods and services.
This view came under attack from at least two viewpoints. Modern mainstream economics points to cases where equilibrium does not correspond to market clearing (but instead to unemploymentIn economics, a person who is able and willing to work yet is unable to find a paying job is considered unemployed . The unemployment rate measures the number of unemployed workers as a proportion of the total civilian labor force, where the latter includ), as with the efficiency wage hypothesisIn labor economics, the efficiency wage hypothesis argues that wages are determined by more than simply supply and demand. Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage in order to increase in labor economics. In some ways parallel is the phenomenon of credit rationing , in which banks hold interest rates low in order to create an excess demand for loans, so that they can pick and choose whom to lend to. Further, economic equilibrium can correspond with monopolyAlternate use: Monopoly (game In economics, a monopoly (from the Greek monos one + polein to sell) is defined as a market situation where there is only one provider of a product or service. Monopolies are characterized by a lack of economic competition fo, where the monopolistic firm maintains an artificial shortage in order to prop up prices and to maximize profits. Finally, Keynesian macroeconomicsKeynesian economics or Keynesianism is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money published in 1936 in response to the Great Depression of the 1930s. In Key points to underemployment equilibriumIn economics, the term underemployment has at least three different meanings. All three of them involve underutilization of labor that is missed by official definitions and measurements of " unemployment. Underutilization of skills In one usage, it descri, where a surplus of labor (i.e., cyclical unemployment) co-exists for a long time with a shortage of aggregate demand.
On the other hand, the Austrian School and Joseph Schumpeter maintained that in the short term equilibrium is never attained as everyone was always trying to take advantage of the pricing system and so there was always some dynamism in the system. The free market's strength was not creating a static or a general equilibrium but instead in organising resources to meet individual desires and discovering the best methods to carry the economy forward.
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