In economicseconomic equilibrium is a state where economic forces such as supply and demand are balanced and in the absence of external influences the equilibrium values of economic variables will not change. For example, in the standard textbook model of perfect competitionequilibrium occurs at the point at which quantity demanded and quantity supplied are equal. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes, and the quantity is called "competitive quantity" or market clearing quantity.

Stock Market Equilibrium and Macroeconomic Fundamentals

However, the concept of equilibrium in economics also applies to imperfectly competitive markets, where it takes the form of a Nash equilibrium. Three basic properties of equilibrium in general have been proposed by Huw Dixon.

In a competitive equilibriumsupply equals demand. Property P1 is satisfied, because at the equilibrium price the amount supplied is equal to the amount demanded. Property P2 is also satisfied. Demand is chosen to maximize utility given the market price: Likewise supply is determined by firms maximizing their profits at the market price: Hence, agents on neither the demand side nor the supply side will have any incentive to alter their actions.

To see whether Property P3 is satisfied, consider what happens when the price is above the equilibrium. In this case there is an excess supply, with the quantity supplied exceeding that demanded. This will tend to put downward pressure on the price to make it return to equilibrium. Likewise where the price is below the equilibrium point there is a shortage in supply leading to an increase in prices back to equilibrium. Not all equilibria are "stable" in the sense of Equilibrium property P3.

It is possible to have competitive equilibria that are unstable. However, if an equilibrium is unstable, it raises the question of how you might get there. Even if it satisfies properties P1 and P2, the absence of P3 means that the market can only be in the unstable equilibrium if it starts off there.

In most simple microeconomic stories of supply and demand a static equilibrium is observed in a market; however, economic equilibrium can be also dynamic. Equilibrium may also be economy-wide or generalas opposed to the partial equilibrium of a single market.

Equilibrium can change if there is a change in demand or supply conditions. 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. The Nash equilibrium is widely used in economics as the main alternative to competitive equilibrium. It is used whenever there is a strategic element to the behavior of agents and the "price taking" assumption of competitive equilibrium is inappropriate. The first use of the Nash equilibrium was in the Cournot duopoly as developed by Antoine Augustin Cournot in his book. This determines the revenues of each firm the industry price times the quantity supplied by the firm.

The profit of each firm is then this revenue minus the cost of producing the output.

Clearly, there is a strategic interdependence between the two firms. If one firm varies its output, this will in turn affect the market price and so the revenue and profits of the other firm. We can define the payoff function which gives the profit of each firm as a function of the two outputs chosen by the firms. Cournot assumed that each firm chooses its own output to maximize its profits given the output of the other firm.

The Nash equilibrium occurs when both firms are producing the outputs which maximize their own profit given the output of the other firm. In terms of the equilibrium properties, we can see that P2 is satisfied: P1 is satisfied since the payoff function ensures that the market price is consistent with the outputs supplied and that each firms profits equal revenue minus cost at this output.

Is the equilibrium stable as required by P3? Cournot himself argued that it was stable using the stability concept implied by best response dynamics. The reaction function for each firm gives the output which maximizes profits best response in terms of output for a firm in terms of a given output of the other firm.

In the standard Cournot model this is downward sloping: Best response dynamics involves firms starting from some arbitrary position and then adjusting output to their best-response to the previous output of the other firm. So long as the reaction functions have a slope of less than -1, this will converge to the Nash equilibrium. However, this stability story is open to much criticism. 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.

Indeed, this occurred during the Great Buy shares cuadrilla resources stock market equilibrium Ireland in —52, where food was exported though people were starving, due to the greater profits in selling to the English — the equilibrium price of the Irish-British market for potatoes was above the price that Irish farmers could afford, and thus among other reasons they starved.

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 would lead to price cutswhich decrease the quantity supplied by reducing the incentive to produce and sell the product and increase the quantity demanded by offering consumers bargainsautomatically abolishing the glut.

Similarly, in an unfettered market, any excess demand or shortage would lead to price increasesreducing the quantity demanded as customers are priced out of the market forex balikbayan box reviews increasing 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 non-market-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. 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 unemploymentas with the efficiency wage hypothesis p&g notice to exercise stock options labor economics.

In some ways parallel is the phenomenon of credit rationingin which banks hold interest rates low to create an excess demand for loans, so they can pick and choose whom to get money for student loans forgiveness to. Further, economic equilibrium can correspond with monopolywhere the conglomerate diversification strategy meaning firm maintains an artificial shortage to prop up prices and to maximize profits.

Finally, Keynesian macroeconomics points to underemployment equilibriumwhere a surplus of labor i. To solve for the equilibrium price, one must either plot the supply and demand curves, or solve for their equations being equal. In the diagram, depicting simple set of supply and demand curves, the quantity demanded and supplied at price P are equal. At any price above P supply exceeds demand, while at a price below P the quantity demanded exceeds that supplied.

In other words, prices where demand and supply are out of balance are termed points of disequilibrium, creating shortages and oversupply. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market. A change in equilibrium price may occur stock market equilibrium a change in either the supply or demand schedules. For instance, starting from the above supply-demand configuration, an increased level of disposable income may produce a new demand schedule, such as the following:.

Here we see that an increase in disposable income would increase the quantity demanded of the good by 2, units at each price. This increase in demand would have the effect of shifting the demand curve rightward.

The result is a change in the price at which quantity supplied equals quantity demanded. Note that a decrease in disposable income would have the exact opposite effect on the market equilibrium.

We will also see similar behaviour in price when there is a change in the supply schedule, occurring through technological changes, or through changes in business costs. An increase in technological usage or know-how or a decrease in costs would have the effect of increasing the quantity supplied at each price, thus reducing the equilibrium price. On the other hand, a decrease in technology or increase in business costs will decrease the quantity supplied at each price, thus increasing equilibrium price.

The process of comparing two static equilibria to each other, as in the above example, is known as comparative statics. For example, since a rise in consumers' income leads to a higher price and a decline in consumers' income leads to a fall in the price — in each case the two things change in the same directionwe say that the comparative static effect of consumer income on the price is positive.

This is another way of saying that the total derivative of price with respect to consumer income is greater than zero.

How Stock Market Trends Work | HowStuffWorks

Whereas in a static equilibrium all quantities have unchanging values, in a dynamic equilibrium various quantities may all be growing at the same rate, leaving their ratios unchanging. For example, in the neoclassical growth modelthe working population is growing at a rate which is exogenous determined outside the model, by non-economic forces.

In dynamic equilibrium, output and the physical capital stock also grow at that same rate, with output per worker and the capital stock per worker unchanging. Similarly, in models of inflation a dynamic equilibrium would involve the price levelthe nominal money supplynominal wage ratesand all other nominal values growing at a single common rate, while all real values are unchanging, as is the inflation rate.

The process of comparing two dynamic equilibria to each other is known as comparative dynamics.

For example, in the neoclassical growth model, starting from one dynamic equilibrium based in part on one particular saving rate, a permanent increase in the saving rate leads to a new dynamic equilibrium in which there are permanently higher capital per worker and productivity per worker, but an unchanged growth rate of output; so it is said that in this model the comparative dynamic effect of the saving rate on capital per worker is positive but the comparative dynamic effect of the saving rate on the output growth rate is zero.

Disequilibrium characterizes a market that is not in equilibrium. Typically in financial markets it either never occurs or only momentarily occurs, because trading takes place continuously and the prices of financial assets can adjust instantaneously with each trade to equilibrate supply and demand.

At the other extreme, many economists view labor markets as being in a state of disequilibrium—specifically one of excess supply—over extended periods of time. Goods markets are somewhere in between: Disequilibrium credit rationing can occur for one of two reasons.

In the presence of usury laws, if the equilibrium interest rate on loans is above the legally allowable rate, the market cannot clear and at the maximum allowable rate the quantity of credit demanded will exceed the quantity of credit supplied.

A more subtle source of credit rationing is that higher interest rates can increase the risk of default by the borrower, making the potential lender reluctant to lend at otherwise attractively high interest rates.

Labour markets are prone to particular sources of price rigidity because the item being transacted is people, and laws or social constraints designed to protect those people may hinder market adjustments.

Such constraints include restrictions on who or how many people can be laid off and when which can affect both the number of layoffs and the number of people hired by firms that are concerned by the restrictionsrestrictions on the lowering of wages when a firm experiences a decline in the demand for its product, and long-term labor contracts that pre-specify wages.

Disequilibrium in one market can affect demand or supply in other markets. Specifically, if an economic agent is constrained in one market, his supply or demand in another market may be changed from its unconstrained form, termed the notional demandinto a modified form known as effective demand. If this occurs systematically for a large number of market participants, market outcomes in the latter market for prices and quantities transacted themselves either equilibrium or disequilibrium outcomes will be affected.

From Wikipedia, the free encyclopedia. Economics A supply and demand diagram, illustrating the effects of an increase in demand. Microeconomics Macroeconomics Methodology Heterodox economics JEL classification codes.

Econometrics Economic growth Economic system Experimental economics Mathematical economics Game theory Post-scarcity Market National accounting.

For more details on this topic, see Nash equilibrium and Cournot model. Microeconomic Analysis Third ed. The Foundations of Economic Thought. Samuelson ; Expanded ed. Food exports to Englandincluding Cecil Woodham-Smith The Great Hunger; Ireland —, and Christine Kinealy, 'Irish Famine: Methods of Macroeconomic Dynamics.

Upper Saddle River, New Jersey Behavioral Business Computational Statistical decision theory Econometrics Experimental Game theory Industrial organization Labor Managerial Mathematical economics Microfoundations of macroeconomics Operations research Optimization.

Retrieved from " https: Market economics Market structure Mathematical and quantitative methods economics. Navigation menu Personal tools Not logged in Talk Contributions Create account Log in. Views Read Edit View history.

Economic equilibrium - Wikipedia

Navigation Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store. Interaction Help About Wikipedia Community portal Recent changes Contact page. Tools What links here Related changes Upload file Special pages Permanent link Page information Wikidata item Cite this page.

MARKET EQUILIBRIUM

In other projects Wikiquote. This page was last edited on 11 Juneat Text is available under the Creative Commons Attribution-ShareAlike License ; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy.

Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Cookie statement Mobile view. A supply and demand diagram, illustrating the effects of an increase in demand. History of economics Economic history academic study Schools of economics Microeconomics Macroeconomics Methodology Heterodox economics JEL classification codes.

Business and economics portal.