Concept of Equilibrium & Dis-equilibrium in Economics

1 year ago

Atiqur Rahman

9 minutes

Meaning of Equilibrium

The Price Mechanism in Micro-Economics leads to the outcome or solution of an Equilibrium (or Dis-Equilibrium).

In Latin, aequus means equal, and libra means scales or balances. (That is why in the Zodiac, the sign Libra is shown by a pair of scales). When the two scales on the two sides of a scales instrument hang at the same level, there is equilibrium, or, in English, Equilibrium. Neither of the scales goes up or down any more, and unless there is some external disturbance, the balance, or equilibrium, holds.

To find the Equilibrium, the two schedules- Supply and Demand, must be matched, or the two curves superimposed on each other. At the price where the quantity demanded is the same as the quantity offered, that is, at the point where the Demand curve and the Supply curve intersect, there is a perfect matching or balancing, i.e., equilibrium. This is depicted in the following figure/diagram:

Putting the two schedules together, we find that only at P=3 will both Qd and Qs be the same, viz., 12. Putting the two curves together, we find that they intersect at (only) the point (12, 3). At the (point 12, 3), thus, there is Equilibrium. This equilibrium holds until and unless there is some external reason tipping the scales either way.

At any price lower than Rest 3 per kg, suppliers would not come forth with the quantity that the buyers are demanding (12 kegs). At any price that is higher, buyers will not be demanding the quantity that suppliers are willing to supply at those (higher) prices. At any price higher or lower than Rest 3 per kg, there will be Excess Demand or Excess Supply in the market.

Note that the plural of Equilibrium is not Equilibriums but Equilibria.

Meaning of Dis-equilibrium

When exogenous or endogenous variables, or some structural imbalances, prevent equilibrium from being reached or maintained, the resulting disturbed situation is known as Disequilibrium.

J. M. Keynes, speaking about Financial Markets, said that markets are usually in a state of Disequilibrium. So, true equilibrium is more of an idea, helpful for building models, but rarely found in real-life situations. This statement can be generalized and applied to all kinds of markets.

In the above diagram (Fig. 8), any point other than the point of intersection is a point of disequilibrium.

Existence, Uniqueness and Stability of Equilibrium

It is not necessary that there will always be an equilibrium situation. If the Demand and Supply curves are such that they never intersect, equilibrium may not exist.

If the demand and supply curves intersect more than once, equilibrium may exist. But this will be Non-Unique or Multiple, i.e., there may be more than one point of balance or equilibrium.

Equilibrium situations, once disturbed, usually go through a process of adjustment and settle down eventually to new equilibrium situations. Such an equilibrium is called a Stable equilibrium.

But sometimes, a disturbed equilibrium may not ever settle down to another equilibrium position but go on getting more and more aggravated. Such an equilibrium is called Unstable.

General Equilibrium & Partial Equilibrium: Concept of Ceteris Paribus

In Economics, a Function may involve more than one variable. Usually, several variables are interlinked. To examine whether any two have a causal (cause-effect) relation, it may be necessary to rule out others that complicate the issue or get in the way of analyzing it. Then what is done to make an assumption known as the ceteris paribus assumption.

In Latin, Ceteris means ‘other things or the rest’, and Paribus means ‘at par or equal’. The phrase Ceteris Paribus thus means ‘other things being the same’. It qualifies or conditions a causal relationship between an independent variable and the dependent variable that depends on it or functions according to it.

Suppose we take up the following Functional Relationship-

The Quantity (Qx) of a Commodity being demanded (symbolized by the variable x) depends on the Price (Px) of the Commodity, the Prices of other commodities (say, y and z) that can complement or substitute it, the Income (Y) and Tastes (T) of the person making the demand.

Symbolically this can be written as:

Qx = f ( Px, Py, Pz, Y, T)

Where Qx is the dependent variable, Px, Py, and Pz, Y and T are the independent variables, and f is the functional form.

Now if we want to focus on the causal relationship between the Price of the commodity (Px) and the Quantity of it that is demanded (Qx), and for the time being, put aside the prices of commodities and the tastes of the consumer, this can be written as Qx = f (Px), ceteris paribus.

This simple yet powerful technique, used extensively by Alfred Marshall, is known as Partial Equilibrium Analysis. However, it lets only one market (at a time) be in equilibrium and may not capture the complexities of the real world.

General Equilibrium Analysis is a contrasting technique, first formalized by Leon Walras. This does not use the ceteris paribus assumption. It lets the interdependence of various variables play itself out. Prices of Commodities are determined simultaneously and mutually. All markets are simultaneously in equilibrium.

Static and Dynamic Equilibrium

In a static equilibrium, all quantities have unchanging values, but in a dynamic equilibrium, various quantities may be growing, only their ratios being unchanged.

Comparative Statics compares two static cases of equilibrium. Comparative Dynamics compares two dynamic equilibria.

Short-Run and Long-Run Equilibrium

A run is a length of time not exactly specified. If all factors of production can be varied over a length of time, it is called the Long Run. If some variables can be varied, but others cannot, i.e., are fixed, it is the Short Run.

A Short Run Equilibrium is one that holds for a short period of time where all variables cannot change their values. A Long Run Equilibrium is one that holds in the Long Run when all the factors concerned are freely variable.

The concepts of Short Run and Long Run are important both in Micro and Macro Economics.

In Micro-Economics (basically Neo-Classical), under perfectly competitive market conditions, some firms may be making super-normal profits or excess profits, others zero profit or even losses. In the course of time, these are erased out, and the long-run perfectly competitive equilibrium shows neither (excess or super-normal) profits nor losses.

In Macro-Economics, the Classical Economists felt that although there may be Unemployment in the economy in the short run, the long run brings Full Employment about. The policy implication of this is that the government of the country does not have to do anything specific to generate jobs. The long run will take care of the Unemployment problem.

‘But in the long run we may all be dead’, said J.M Keynes. He urged the government to play an active role in the generation of income and employment in the country. The Keynesian type of Macro-Economics is thus essentially a short-run theory.

But the Long Run Equilibrium is not necessarily a Dynamic Equilibrium.

Concept of Equilibrium & Dis-equilibrium in Economics

Meaning of Equilibrium

Meaning of Dis-equilibrium

Existence, Uniqueness and Stability of Equilibrium

General Equilibrium & Partial Equilibrium: Concept of Ceteris Paribus

Static and Dynamic Equilibrium

Short-Run and Long-Run Equilibrium

Read More- Microeconomics

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Meaning of Equilibrium

Meaning of Dis-equilibrium

Existence, Uniqueness and Stability of Equilibrium

General Equilibrium & Partial Equilibrium: Concept of Ceteris Paribus

Static and Dynamic Equilibrium

Short-Run and Long-Run Equilibrium

Read More- Microeconomics

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