Login with Facebook

Introduction to Market Equilibrium

Economic studies take different shapes across the world. However, when talking about the world economy, there are certain aspects that make everything seem like one. It is very difficult to fully understand the economy by simply looking at it from one point of view. Consumer decisions, as well as firm marketing decisions. We all have to make decisions, even when we don’t want to. And these decisions are involved in the making of the market.

One of the major characteristics of economies is fluctuations. At times, the economy picks and performs to the highest, whereas other times meet the lowest areas of the economy. It is these changes that make the world around. Both consumers and producers interact in a market environment to create a balance with the markets. Without consumers buying their goods, firms would not have the ability nor the reason to produce. And without firms making products, we would have anything to consume. This interaction describes what a market is.

Markets are generally imperfect. In other words, there is always scarcity within an economy at any given time. It is the aspect of economic growth and development that brings about economic fluctuations. This development depends on the available resources – which are limited, yet must serve unlimited human needs. For instance, if someone wanted to live in a nice house, they will need money for it, which means they will have to find work. But with the increasing population, work is becoming more and more scarce. Those who can employ look for specific skills, which not every consumer will have. And perhaps competition in their area of expertise is out through the roof. This means they will have to be more careful about their consumption choices.

A perfect economy is where consumption and production are on the same level. This means there is no producer who comes with exaggerated prices, and all consumers are able to buy the goods and services without exhausting the company’s resources. Also, producers can make enough goods and serves with surety that they will be fully consumed. In such a situation, everyone gets what they want at the best deals. Consumers cannot complain about high prices, and producers cannot complain about low prices. And this leads us to a state of economic equilibrium.

What is the economic equilibrium?

Understand economic equilibrium is vital to modern economies because it helps us know where an economy should be. It acts as a point of reference for a perfect economy so that when something wrong happens, stakeholders can come together to try and rectify it. There is always something happening in an economy. As stated above, producers and consumers interact at different levels within markets for the benefit of both parties. Economic equilibrium can be easily referred to as a point of consensus between the two parties.

Another idea could be that economic equilibrium is a state achieved when there is a balance within economic forces. In this case, economic variables remain the same without any changes from the equilibrium values where external influences are absent. It can also be called market equilibrium. There is a combination of economic variables, which usually involve price and quantity. People are often referred to as rational decision-makers, whereby they will decide based on the level of benefit that comes from the product displayed. When one is not good enough, they will leave it for another. And when there are two similar products with the same value, they will go for the cheapest. On the other hand, producers base their decisions on the rate of consumption and the availability of raw materials. When the market is good, they will give more, but when it is low, they will give less.

The terms economic equilibrium also appears in interest rates of aggregate consumption spending. Financial markets play a vital role in the development and stability of markets. Refer back to the 2008/2009 economic crises, which were initiate because of the failure of financial markets. It all began with an economic bubble the preceded this period. Financiers were not careful enough to vet who received their loans, and the securities they gave, especially in the housing industry, soon dropped in value. Those who had borrowed were no longer able to pay back, which led to a tragedy affecting all other industries. Governments quickly came up with fiscal and monetary policies to restore the economy, some of which are being applied even today. They create these measures based on the assumptions of what a balanced economy should be. Hence, the reduced interest rates while adding more liquidity to banks so that more borrowers would be interested.

Even though economic equilibrium is something good that should be applauded, it does not easily happen in real life. In fact, it is just a theoretical state of rest where all economic transactions that are expected to occur, considering the state of all relevant economic variables, have happened.

Equilibrium can also be considered a state of equity. It is an idea borrowed from the physical science, by economists who look at economic processes as initiators of physical phenomena such as velocity, friction, or fluid pressures. When there is a balance in these physical forces, there will be no further changes. It is like a point of elasticity for a rubber band. When stretched to the last point, you cannot expect any further process to take place because it is at its last point where the pulling pressure and its extension are equal. Consider a balloon too; you blow in as much air as possible to inflate it, whereby the increasing force in the air increases the pressure inside the balloon. In the end, the pressure inside is greater than the pressure outside, meaning the pressures are not balanced. This is what causes the balloon to expand so that there is a balance between the pressures. And when the balloon stops expanding, it means the two pressures are at equilibrium.

We can think of a similar situation on the economic environment, in reference to market prices, supplies, and demand. There is no day you will find the prices of goods given higher than their quantity. If this were to happen, consumption would rise rapidly with buyers demanding larger quantities of goods that suppliers are not able, or not willing to offer. Similar to the pressure within and around the balloon, there will be no balance between these two aspects. We can always take the consequences of such a situation will not be good. It could lead to the production of fake goods on the market, apart from the overwhelming supply. The same condition can be linked to oversupply in the market. Too many goods on the market without enough consumption will lead to disequilibrium.

For an economy to be perfect, therefore, something has to give. As stated in the beginning, consumers are rational decision-makers. Hence, they will have to offer higher prices to induce sellers to release their products. Besides, most consumers make a buying decision based on the price. Consider the fashion industry; for instance, quality is directly linked to high prices, where a more expensive gown is perceived of better quality than a cheaper one. This happens in many other consumer products.

Such situations are responsible for the fluctuations within markets. And they will remain so until the pressure equalizes. When demand is high, supply will go down, and supply will always be higher when demand is high. Eventually, it will reach a state of balance where quantity demand is equal to quantity supply. Such a state is referred to as market equilibrium.

Properties of economic equilibrium

Huw Dixon proposed that there are three properties of economic equilibrium. They include:

1. That the behavior of agents is consistent

2. There is no agent that can be incentivized to alter its behavior

3. Equilibrium is a result of some dynamic process, which is stability

We can use different situations to describe these properties:

Competitive equilibrium

Competitive equilibrium is one of the best examples of equilibrium. In this case, supply is equal to demand, and property one is justified. In this equilibrium, the amount supplied and the amount demands are at the same level at the equilibrium prices. 

The second property is also satisfied because demand is used to maximize utility as given at the market price. There is no one on the demand side incentivized to offer more or less of the current price. In the same way, supply is determined when firms use their profits at the market price. In this case, no firm will want to supply any more or less at the equilibrium price. In either situation, agents on the demand or supply side will not have any incentive to change their actions.

Think about what happens when the prices are about equilibrium. We can use this to determine whether or not the third property is fulfilled. In this case, it means the supply is in excess, with more supply than demand – which tends to initiate a downward pressure situation to restore the equilibrium. And when the price is below the equilibrium, supply goes into shortage as demand surges pulling prices along – which ends up returning prices to an equilibrium. Note, however, that not all equilibria are equal in the third property. If there is no stability within an equilibrium, the question of reaching it comes it. Even if the property one and property two are stable, the market will only get to a stage of instability if property three remains absent.

A static equilibrium is critical in a simple microeconomic story of supply and demand, but equilibrium can also be dynamic. As if that is not enough, it can also be economic-wide or general, depending on the actions of the factors involved. If there is a change in demand and supply, then equilibrium can change. For instance, too much demand will have an effect on equilibrium, leading to low prices of goods. When this happens, consumers will buy more, leading to scarcity of the gods, hence, increasing the price once more. Eventually, there will come a new equilibrium, at which, there will be no change in the price or on the amount of demand and supply – until another shift in demand or supply comes up again.

Nash Equilibrium

The Nash equilibrium has been used widely by many economists to represent competitive equilibrium. They use it whenever a strategic element of the action of agents, as well as the ‘price taking’ assumption of the competitive equilibrium, are not appropriate. The Nash equilibrium was applied by Antoine Augustin Cournot when he recorded in his book in 1838. In this case, both firms produce the same product. Based on the total amount of the two both firm’s products, they all have the same price, which is determined by a demand curve. In this end, the profit of each firm is determined as the revenue, minus the cost of production. In this strategy, each firm comes with different strategies. If there is a variation in the output of one firm, it will affect the market price and extend to the second firm's revenue. The payoff function that profits each firm is a function of the two inputs as presented by the firms. The Nash equilibrium is seen where both firms are making outputs that maximize their specific outputs.

Under this condition, property two is satisfied since none of the firms are incentivized to deviate from the Nash equilibrium, considering the other firm's output. And since the payoff function keeps the market price consistent with supply outputs, and revenues from both firms are equal, property two is also achieved. In terms of property three, Cournot suggested that it was stable, considering the use of the concept, as shown by best response variations. Each firm comes out with a reaction on a given output of the other firm. Hence, this is downward in slopingMarket Equilibrium, whereby the best response would be to give out less when the other firm’s output is more. And the best response dynamic means the companies have to begin from a certain position before adjusting their output to meet the new demand. But this is just a stability story that has attracted so much criticism.

Author: James Hamilton


Comments

Need a custom
essay?

We will write it for you.
Order now

Free Essay Examples

Free essays:

An insight into the error-correction models
All you need to know about management discipline?
A historical overview of Financial Crises
All you need to know about reaction kinetics?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Contracting with Moral Hazard and Adverse Selection
Conflict management in an organization
Can social media help overcome the problem of illiteracy?
Cultural heritage of indigenous people.
Digital Illiteracy
Determinants of business cycles fluctuations
Determinants of Unemployment and Inflation
Different tissues of the body
Economic Analysis of Market Structure
Expected Utility
Everything you need to know about workplace diversity
Efficiency and Market Equilibrium
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Fiscal and Monetary Policies in Response to 2008/2009
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
Gene expression: what it is and why it is important
Global environmental issues
How to conduct economic research?
How to define the Enterprise Value
How cancer is developed - Cancer biology
How can financial illiteracy harm you?
Illiteracy in the USA
Importance and seven principles of quality management
Intermediaries and Government in Financial Crisis
Introduction to Econometric Application
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Methods of labeling of nucleic acid that enable their detection
Macroeconomics: International Economic Issues
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Protection of cultural heritage in times of war and peace.
Principles of Corporate Governance.
Risk Sharing in Insurance and Asset Markets
Risk and the value of information
Reverse discrimination.
Role of media in wartime.
Segregation in the US.
Stages of the Consumer Decision-Making Process
Structure and function of blood vessels
Skills in Journalism: Effective Interview
Theories of Public Policy
The Economics of Uncertainty – Introduction
The different medical imaging techniques
Tips for labeling medical devices- Medical Entrepreneurship
Understanding Auctions and Auction Theory: Part 2
Understanding Auctions and Auction Theory: Part 1
Use of Machine Learning in Econometrics
Understanding Public Policy
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What is Immune System and Immunotherapy?
What are the methods of valuation of companies?
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?