Loading the player...

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.

!--break--Also referred to market equilibrium, economic equilibrium is the point at which all economic factors within either a particular product, industry or the market as a whole reach an optimum balance between supply and demand, including in the cost of the items involved. The term economic equilibrium can also be applied to any number of variables, such as the interest rate, that allow the greatest growth of the banking and non-financial sector, or that create the ideal number of employment opportunities within a particular sector.

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.

Equilibrium can also be disrupted by certain large-scale events. These can include economic shifts related to events such as the 2008 financial crisis, which led to significant imbalances in the housing market, or can include changes in response to a large-scale natural disaster. For example, if a production facility is destroyed in a fire, the remaining supply may not be sufficient to cover long-term demand. In contrast, consumers who are managing losses due to a flood may choose to reallocate their spending based on new priorities, such as the replacement of goods that were damaged. Additionally, if a disaster results in temporary unemployment, consumer spending for non-essentials may decrease, resulting in a supply surplus.

BREAKING DOWN 'Economic Equilibrium '

  1. Equilibrium

    The state in which market supply and demand balance each other ...
  2. General Equilibrium Theory

    General equilibrium theory studies supply and demand fundamentals ...
  3. Equilibrium Quantity

    Equilibrium quantity represents the amount of an item that is ...
  4. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited ...
  5. Neoclassical Growth Theory

    The neoclassical growth theory is an economic concept where equilibrium ...
  6. Lindahl Equilibrium

    A concept that proposes that individuals pay for the provision ...
Related Articles
  1. Investing

    Why You Can't Influence Gas Prices

    Don't believe the water-cooler talk. Big oil companies aren't to blame for high prices.
  2. Investing

    Game Theory: Beyond the Basics

    Take your game theory knowledge to the next level by learning about the Nash Equilibrium.
  3. Insights

    Fed's Fischer: Aging Population Suppressing Rates

    Federal Reserve Vice Chairman Stanley Fischer said the aging population and slow investment is keeping rates suppressed.
  4. Insights

    What is Supply & Demand?

    The law of supply and demand is one of the most basic principles in economics. In simplest terms, the law of supply and demand states that when an item is scarce, but many people want it, the ...
  5. Trading

    An Introduction To J-Charting

    Learn about a technical tool that's based on the view that markets are energetic systems.
  6. Investing

    Effect of Fed Fund Rate Hikes on Oil

    Find out how oil markets might react to an interest rate hike by the Federal Reserve, and why consumers and bondholders could love a rising interest rate.
  7. Taxes

    The Link Between The Fed, Money, Debt And Taxes

    Assets on the Fed's balance sheet, money supply level, national debt level and economic production should be maintained in equilibrium.
  1. How Does the Law of Supply and Demand Affect Prices?

    Learn how the law of supply and demand affects prices. Read Answer >>
  2. What does the Nash equilibrium predict?

    Learn more about the famous Nash equilibrium, which is the revolutionary concept in game theory about the economics of human ... Read Answer >>
  3. What is the difference between a dominant strategy solution and a Nash equilibrium ...

    Dive into game theory and the Nash equilibrium, and learn why the Nash equilibrium assumptions about information are less ... Read Answer >>
  4. How do externalities affect equilibrium and create market failure?

    Discover the ways that externalities lead to market failure. Externalities are costs or benefits that go to a third party, ... Read Answer >>
  5. Why are there no profits in a perfectly competitive market?

    See why economic profits are theoretically impossible in a perfectly competitive market and why some economists use perfect ... Read Answer >>
  6. How can I calculate a company's forward p/e in Excel?

    Discover why trading volume is higher when the price of a security changes. Supply and demand is the mechanism through which ... Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center