Existence of equilibrium

The existence of equilibrium refers to a state in economics and finance where supply and demand are balanced, leading to a stable market condition where there are no inherent forces driving change.
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Updated on Jun 13, 2024
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3 key takeaways:

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  • Equilibrium occurs when market supply and demand balance, resulting in stable prices and quantities.
  • The concept is fundamental in economics, indicating a point where economic forces are in balance.
  • Various models and theories analyze the conditions under which equilibrium exists, such as market clearing in perfect competition.

What is the existence of equilibrium?

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The existence of equilibrium in economics is a condition where the quantity supplied equals the quantity demanded in a market, leading to a stable price and quantity of goods or services. This concept is essential as it describes a state where market forces are balanced, and there is no incentive for price or quantity to change unless an external force disrupts the equilibrium.

Equilibrium can be analyzed in different contexts, including individual markets (market equilibrium), the overall economy (macroeconomic equilibrium), or in game theory, where players’ strategies are in balance (Nash equilibrium).

How does equilibrium work?

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Equilibrium is achieved when various factors in a market align to balance supply and demand. Here’s how it typically works:

  1. Market Supply and Demand: The supply curve represents the quantity of goods producers are willing to sell at different prices, while the demand curve represents the quantity of goods consumers are willing to buy at different prices. The point where these two curves intersect is the equilibrium price and quantity.
  2. Price Adjustment: If there is an excess supply (surplus) or excess demand (shortage), prices will adjust. For instance, a surplus will drive prices down, increasing demand and decreasing supply until equilibrium is reached. Conversely, a shortage will drive prices up, decreasing demand and increasing supply.
  3. Economic Forces: At equilibrium, the economic forces of supply and demand are balanced. Producers are selling all the goods they produce, and consumers are getting all the goods they demand at the equilibrium price.
  4. Stability: In equilibrium, there is no tendency for change unless an external factor, such as a change in consumer preferences, production technology, or government policy, disrupts the balance.

Key features of equilibrium:

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The concept of equilibrium has several important features and implications:

  • Market Clearing: At equilibrium, markets clear, meaning there are no unsold goods (surplus) or unmet demand (shortage). This efficient allocation of resources is a key aspect of market equilibrium.
  • Price Stability: Equilibrium results in stable prices where the forces of supply and demand are balanced. Prices only change in response to external shifts in supply or demand.
  • Theoretical Models: Various economic models, such as supply and demand graphs, general equilibrium models, and game theory, analyze and illustrate the conditions for equilibrium.
  • Efficiency: Equilibrium often represents an efficient allocation of resources, where consumer and producer surplus are maximized. In a perfectly competitive market, equilibrium is considered Pareto efficient, meaning no one can be made better off without making someone else worse off.
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  • Market equilibrium: Understanding the balance between supply and demand in individual markets and the factors that influence this balance.
  • Nash equilibrium: Insights into a concept in game theory where players’ strategies are in balance, and no player can benefit by unilaterally changing their strategy.
  • Macroeconomic equilibrium: Exploring the overall balance in an economy, including aggregate supply and demand and their impact on economic stability.

Exploring these related topics will provide a comprehensive understanding of the existence of equilibrium, its implications in different economic contexts, and the conditions under which it is achieved.


Sources & references

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Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...