Question

Equilibrium conditions

o Define / Understand

o Implications of the conditions

Answer 1

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.

Equilibrium is the state in which market supply and demand balance each other, and as a result, prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.

Equilibrium is a state of balance in an economy, and can be applied in a number of contexts. In elementary micro-economics, market equilibrium price is the price that equates demand and supply in a particular market. In this situation the market ‘clears’ at the equilibrium price – everything that is taken to market by producers is taken out of the market by consumers. This situation is commonly referred to as ‘partial’ equilibrium.

In introductory macro-economics, national income is in equilibrium when aggregate demand (AD) equals aggregate supply (AS).

Disequilibrium occurs when a variable changes to create an excess of demand or supply, causing a ‘movement’ to a new equilibrium position. A sudden change is called an economic shock.

The implication of the condition of equilibrium

Equilibrium of firm is taken from science and it is a state of process where the forces which are opposite to each other become equal.

The equilibrium of a firm is achieved when the “existing level of output” is acceptable. When the profit or income is maximum, the industry is said to be in equilibrium.

Equilibrium of a firm should have “marginal cost and marginal revenue” which is maintained at the same level.

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