Concept of Equilibrium & Dis-equilibrium in Economics

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.

Read More- Microeconomics

1. Microeconomics: Definition, Meaning and Scope
2. Methods of Analysis in Economics
3. Problem of Choice & Production Possibility Curve
4. Concept of Market & Market Mechanism in Economics
5. Concept of Demand and Supply in Economics
6. Concept of Equilibrium & Dis-equilibrium in Economics
7. Cardinal Utility Theory: Concept, Assumptions, Equilibrium & Drawbacks
8. Ordinal Utility Theory: Meaning & Assumptions
9. Indifference Curve: Concept, Properties & Shapes
10. Budget Line: Concept & Explanation
11. Consumer Equilibrium: Ordinal Approach, Income & Price Consumption Curve
12. Applications of Indifference Curve
13. Measuring Effects of Income & Excise Taxes and Income & Excise Subsidies
14. Normal Goods: Income & Substitution Effects
15. Inferior Goods: Income & Substitution Effects
16. Giffen Paradox or Giffen Goods: Income & Substitution Effects
17. Concept of Elasticity: Demand & Supply
18. Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
19. Determinants of Price Elasticity of Demand
20. Measuring Price Elasticity of Demand
21. Price Elasticity of Supply and Its Determinants
22. Revealed Preference Theory of Samuelson: Concept, Assumptions & Explanation
23. Hicks’s Revision of Demand Theory
24. Choice Involving Risk and Uncertainty
25. Inter Temporal Choice: Budget Constraint & Consumer Preferences
26. Theories in Demand Analysis
27. Elementary Theory of Price Determination: Demand, Supply & Equilibrium Price
28. Cobweb Model: Concept, Theorem and Lagged Adjustments in Interrelated Markets
29. Production Function: Concept, Assumptions & Law of Diminishing Return
30. Isoquant: Assumptions and Properties
31. Isoquant Map and Economic Region of Production
32. Elasticity of Technical Substitution
33. Law of Returns to Scale
34. Production Function and Returns to Scale
35. Euler’s Theorem and Product Exhaustion Theorem
36. Technical Progress (Production Function)
37. Multi-Product Firm and Production Possibility Curve
38. Concept of Production Function
39. Cobb Douglas Production Function
40. CES Production Function
41. VES Production Function
42. Translog Production Function
43. Concepts of Costs: Private, Social, Explicit, Implicit and Opportunity
44. Traditional Theory of Costs: Short Run
45. Traditional Theory of Costs: Long Run
46. Modern Theory Of Cost: Short-run and Long-run
47. Modern Theory Of Cost: Short Run
48. Modern Theory Of Cost: Long Run
49. Empirical Evidences on the Shape of Cost Curves
50. Derivation of Short-Run Average and Marginal Cost Curves From Total Cost Curves
51. Cost Curves In The Long-Run: LRAC and LRMC
52. Economies of Scope
53. The Learning Curve
54. Perfect Competition: Meaning and Assumptions
55. Perfect Competition: Pricing and Output Decisions
56. Perfect Competition: Demand Curve
57. Perfect Competition Equilibrium: Short Run and Long Run
58. Monopoly: Meaning, Characteristics and Equilibrium (Short-run & Long-run)
59. Multi-Plant Monopoly
60. Deadweight Loss in Monopoly
61. Welfare Aspects of Monopoly
62. Price Discrimination under Monopoly: Types, Degree and Equilibrium
63. Monopolistic Competition: Concept, Characteristics and Criticism
64. Excess Capacity: Concept and Explanation
65. Difference Between Perfect Competition and Monopolistic Competition
66. Oligopoly Market: Concept, Types and Characteristics
67. Difference Between Oligopoly Market and Monopolistic Market
68. Oligopoly: Collusive Models- Cartel & Price Leadership
69. Oligopoly: Non-Collusive Models- Cournot, Stackelberg, Bertrand, Sweezy or Kinked Demand Curve
70. Monopsony Market Structure
71. Bilateral Monopoly Market Structure
72. Workable Competition in Market: Meaning and Explanation
73. Baumol’s Sales Revenue Maximization Model
74. Williamson’s Model of Managerial Discretion
75. Robin Marris Model of Managerial Enterprise
76. Hall and Hitch Full Cost Pricing Theory
77. Andrew’s Full Cost Pricing Theory
78. Bain’s Model of Limit Pricing
79. Sylos Labini’s Model of Limit Pricing
80. Behavioural Theory of Cyert and March
81. Game Theory: Concept, Application, and Example
82. Prisoner’s Dilemma: Concept and Example