Question

if consumers were the only ones buying goods in the economy, would the economy be at equilibrium ? Why or why not ?

Answer 1

Consumers are the demand side of the economy. That means they are the ones who are responsible for paying for the goods and services that are produced in the economy. However, the government also forms an important part of the aggregate demand in the economy. Without the government demand, if the consumers were the only people to demand goods in the economy, then the economy would still be in equilibrium, but that equilibrium would be fluctuating, and with the slightest disequilibritating forces, the economy would go into a spiral. Consider the following -

1. If there is recesssionary trend, then the demand will be low, as a result, the prices would fall, which will reduce the production, the incomes would reduce, and the demand would reduce further. Each of these will be an equilibrium position, but the equilibrium will not be stable and the economy will go further down into recession. To being the equilibrium back to normal, the government has to step in and increase the aggregate demand.
2. If there is boom trend, then the demand will be high, as a result, the prices would rise, which will increase the production, the incomes would increase, and the demand would increase further. Each of these will be an equilibrium position, but the equilibrium will not be stable and the economy will go further into expansion. To being the equilibrium back to normal, the government has to step in and decrease the aggregate demand, by imposing additional taxes, otherwise inflation would hit the economy bad.

Hence, demand coming just from the consumers is not equilibrating because the consumers are more susceptible to fluctuations in the economy.