Become a Contributor

Economic Equilibrium

Economic Equilibrium

A concise write-up on the basics of economic equilibrium, with reference to its definition, benefits, and various factors that lead to its disruption.
Abhijit Naik
Going by its definition, the term 'equilibrium' refers to a stable situation which results from all the forces in question either being stable or canceling each other. Though the concept is used widely in various fields, it is most popular in economics and science.

Economic Equilibrium Explained

The economic condition characterized by balanced economic forces and absence of external influences, which determine the behavior of these forces and thus, have the ability to disrupt this balance, is referred to as 'economic equilibrium'. With a great deal of difference in opinion as to which are these 'factors' that need to be balanced, the demand-supply relationship seems to be the best bet when explaining what economic equilibrium is. In this case, it's the point at which the quantity of goods and services demanded and the quantity supplied is the same.

In a demand and supply graphical representation, it is the point wherein the demand curve and supply curve intersect each other. Even though it is defined in context of the world in most of the cases, it can be restricted to certain geographical location or a particular industry at times. In other words, economic equilibrium can be a static or dynamic concept, which can exist in single market as well as multiple markets of the world.

A Win-win Situation

The condition of equilibrium in economics is typically characterized by efficient allocation of goods and services, as the amount of goods supplied is same as the amount of goods in demand. This results in an ideal market situation, wherein sellers and buyers, both are satisfied with the proceedings. While sellers are satisfied as they are able to sell all the goods that they produced, buyers are satisfied with the fact that their demand is fulfilled.

Furthermore, sellers don't have to worry about the production in excess, which otherwise has to be stored and assessed for taxes. At the same time, the consumer (buyer) has the option of opting for quality, instead of going by the cost factor, as the price for these goods and services is more or less similar in the competitive market.

Economic Disequilibrium

Economic equilibrium can be affected by a number of factors in the marketplace. A disturbance in this equilibrium will be nothing but a disturbance in demand and supply of goods and services (more demand and less supply, or vice versa.) This condition is referred to as 'disequilibrium' in the field of economics.

One of the most prominent exogenous factors that can disturb economic equilibrium is the consumer behavior. Any change in consumer taste can bring down the demand for goods and services, which, in turn, can trigger an oversupply of goods and disturb the characteristic balance of the equilibrium.

Similarly, political shift in the country or countries is yet another exogenous factor which can result in disequilibrium in the economy. Like equilibrium, even disequilibrium is not a constant phenomenon. The state of economic disequilibrium prevails until a new level of equilibrium is attained.

When various exogenous factors contribute and cause disturbance in equilibrium, the economy undergoes some adjustments to fill in for the new circumstances that have surfaced in the market. As the marketplace gets used to these adjustments, the period of disturbance comes to an end and a new period of stability, thus a new economic equilibrium begins.