What is Economic Equilibrium
Economic equilibrium is a condition or state in which economic forces are balanced. In effect, 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.
Economic equilibrium is also referred to as market equilibrium.
What Is Economic Equilibrium?
BREAKING DOWN Economic 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, included 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 it, 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 market 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.