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Encyclopedia > Economic equilibrium
Price of market balance
Price of market balance

In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the abscence of external shocks the (equilibrium) values of economic variables will not change. Market equilibrium, for example, refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the equilibrium or market clearing price and will tend not to change unless demand or supply change. Image File history File links Price_of_market_balance. ... Image File history File links Price_of_market_balance. ... Face-to-face trading interactions on the New York Stock Exchange trading floor Look up economics in Wiktionary, the free dictionary. ... Prices tend to vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Prices tend to vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... In economics, market clearing refers to either a simplifying assumption made by the new classical school that markets always go to where the quantity supplied equals the quantity demanded; or the process of getting there via price adjustment. ...


Traits

When the price is above the equilibrium point there is a surplus of supply; where the price is below the equilibrium point there is a shortage in supply. Different supply curves and different demand curves have different points of economic equilibrium. In most simple microeconomic stories of supply and demand in a market, we see a static equilibrium in a market; however, economic equilibrium can exist in non-market relationships and can be dynamic. Equilibrium may also be multi-market or general, as opposed to the partial equilibrium of a single market The intersection of supply and demand in any market where market is defined as any place virtual or otherwise where exchange occurs between buyers (demand) and sellers (supply). ... General Equilibrium (linear) supply and demand curves. ... Definition A partial equilibrium is a special case of the general economic equilibrium, where the clearance on the market of some specific goods is obtained independently from prices and quantities demanded and supplied on other goods markets. ...


As in most usage (say, that of chemistry), in economics equilibrium means "balance," here between supply forces and demand forces: for example, an increase in supply will disrupt the equilibrium, leading to lower prices. Eventually, a new equilibrium will be attained in most markets. Then, there will be no change in price or the amount of output bought and sold — until there is an exogenous shift in supply or demand (such as changes in technology or tastes). That is, there are no endogenous forces leading to the price or the quantity. Exogenous (or exogeneous) (from the Greek words exo and gen, meaning outside and production) refers to an action or object coming from outside a system. ... By the mid 20th century humans had achieved a level of thinking mastery sufficient to leave the surface of the planet for the first time and explore space. ... Preference (or taste) is a concept, used in the social sciences, particularly economics. ... In an economic model, an endogenous change is one that comes from inside the model and is explained by the model itself. ...


Not all economic equilibria are stable. For an equilibrium to be stable, a small deviation from equilibrium leads to economic forces that returns an economic sub-system toward the original equilibrium. For example, if a movement out of supply/demand equilibrium leads to an excess supply (glut) that induces price declines which return the market to a situation where the quantity demanded equals the quantity supplied. If supply and demand curves intersect more than once, then both stable and unstable equilibria are found.


There is nothing inherently good or bad about equilibrium, so it is a mistake to attach normative meaning to this concept. For example, food markets may be in equilibrium at the same time that people are starving (because they cannot afford to pay the high equilibrium price). In philosophy, normative is usually contrasted with positive, descriptive or explanatory when describing types of theories, beliefs, or statements. ...


Interpretations

In most interpretations, classical economists such as Adam Smith maintained that the free market would tend towards economic equilibrium through the price mechanism. That is, any excess supply (market surplus or glut) will lead to price cuts, which decrease the quantity supplied (by reducing the incentive to produce and sell the product) and increase the quantity demanded (by offering consumers bargains). This automatically abolishes the glut. Similarly, in an unfettered market, any excess demand (or shortage) will lead to price increases, which lead to cuts in the quantity demanded (as customers are priced out of the market) and increases in the quantity supplied (as the incentive to produce and sell a product rises). As before, the disequilibrium (here, the shortage) disappears. This automatic abolition of market non-clearing situations distinguishes markets from central planning schemes, which often have a difficult time getting prices right and suffer from persistent shortages of goods and services. Classical economics is widely regarded as the first modern school of economic thought. ... Adam Smith, LL.D., FRS, FRSE (born June 5, 1723 O.S. / June 16 N.S. / July 17, 1790) was a Scottish political economist and moral philosopher. ... A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... A price mechanism or market-based method is any of a wide variety of ways to match up offers and requests that market players bid and ask: a bid is an offer to pay a fixed amount that is held open for a period of time an ask is an... In economics, market clearing refers to either a simplifying assumption made by the new classical school that markets always go to where the quantity supplied equals the quantity demanded; or the process of getting there via price adjustment. ... A planned economy is an economic system in which decisions about the production, allocation and consumption of goods and services are planned ahead of time, usually in a centralized fashion, though some proposed systems favour decentralized planning. ...


This view came under attack from at least two viewpoints. Modern mainstream economics points to cases where equilibrium does not correspond to market clearing (but instead to unemployment), as with the efficiency wage hypothesis in labor economics. In some ways parallel is the phenomenon of credit rationing, in which banks hold interest rates low in order to create an excess demand for loans, so that they can pick and choose whom to lend to. Further, economic equilibrium can correspond with monopoly, where the monopolistic firm maintains an artificial shortage in order to prop up prices and to maximize profits. Finally,Keynesian macroeconomics points to underemployment equilibrium, where a surplus of labor (i.e., cyclical unemployment) co-exists for a long time with a shortage of aggregate demand. An 1837 political cartoon about unemployment in the United States. ... In labor economics, the efficiency wage hypothesis argues that wages, at least in some markets, are determined by more than simply supply and demand. ... Labour economics seeks to understand the functioning of the market for labour. ... Rationing is the controlled distribution of resources and scarce goods or services: it restricts how much people are allowed to buy or consume. ... In economics, a monopoly (from the Latin word monopolium - Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service. ... Keynesian economics (pronounced ), also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of 20th century British economist John Maynard Keynes. ... In economics, the term underemployment has at least three different distinct meanings and applications. ... An 1837 political cartoon about unemployment in the United States. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ...


On the other hand, the Austrian School and Joseph Schumpeter maintained that in the short term equilibrium is never attained as everyone was always trying to take advantage of the pricing system and so there was always some dynamism in the system. The free market's strength was not creating a static or a general equilibrium but instead in organising resources to meet individual desires and discovering the best methods to carry the economy forward. The Austrian School, also known as “the Vienna School” and as “the Psychological School”, is a school of economic thought that advocates the adherence to strict methodological individualism. ... Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ... A dynamical system is a concept in mathematics where a fixed rule describes the time dependence of a point in a geometrical space. ... In physics, static equilibrium, or neutral balance, exists when the forces (actions), and torques, on all components of a defined system are balanced such that no component is undergoing an acceleration relative to the designated frame of reference. ... General Equilibrium (linear) supply and demand curves. ...


See also


  Results from FactBites:
 
Economic equilibrium - Wikipedia, the free encyclopedia (739 words)
In economics, economic equilibrium often refers to an equilibrium in a market that "clears": this is the case where a market for a product has attained the price where the amount supplied of a certain product equals the quantity demanded.
The concept of equilibrium is also applied to describe and understand other sub-systems of the economy that do not follow the logic of supply and demand, for example, population growth.
Modern mainstream economics points to cases where equilibrium does not correspond to market clearing (but instead to unemployment), as with the efficiency wage hypothesis in labor economics.
Encyclopedia: Economic equilibrium (1522 words)
Economics (deriving from the Greek words οίκω [oeko], house, and νέμω [nemo], distribute) is the social science that studies the allocation of scarce resources through measurable variables.
In physics, static equilibrium exists when the forces (actions) on all components of a defined system are balanced with the reactions such that no component is undergoing an acceleration relative to the designated frame of reference.
The Austrian School is a school of economic thought which rejects opposing economists reliance on methods used in natural science for the study of human action, and instead bases its formalism of economics on relationships through logic or introspection called praxeology.
  More results at FactBites »

 
 

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