Economic Equilibrium

What is Economic Equilibrium?

Economic equilibrium meaning can be referred to as the state or condition in which the respective economic forces of the Economy tend to be balanced. In the given effect, the economic factors are known to remain unchanged from the respective equilibrium values during the absence of any external influence. Economic equilibrium is also known as ‘Market equilibrium.’

Economic equilibrium is a combination of several economic variables (mostly quantity and price) across which standard economic processes –including supply & demand, are known to drive the given economy. The given terms in the field of Economics can also be applied to a wide number of variables, including - aggregate consumption and interest rates.

The equilibrium point is known to represent the theoretical state of ultimate rest wherein all the economic transactions that are supposed to occur, provided the initial state of the economic variables, should have already taken place.

Understanding of Economic Equilibrium

It is the concept that has been borrowed from the applications of the physical sciences. The term was observed by the economists who imagine economic processes to be analogous to some physical phenomenon, including heat, friction, fluid pressure, or velocity. When the physical forces tend to be balanced in the particular system, no change is known to occur.

In the field of economics, the same principle can be applied to the concepts of demand, supply, and market prices. If the price in the particular market tends to be too low, then the overall quantity that the buyers will be demanding would turn out to be more in comparison to the quantity that the respective sellers might be willing to provide. As such, demand & supply will not achieve a state of balance. As a result, a state of oversupply occurs in the market. This is referred to as the state of market disequilibrium.

The buyers will have to provide more prices for inducing the sellers to make way with the respective goods. By doing so, the market price would rise to the level wherein the quantity of demand will be equal to the quantity that has been supplied. Eventually, the given value for the market price would reach a state of balance wherein the quantity that has been demanded will be just equal to the quantity that has been supplied. This overall is referred to as economic equilibrium.

Types of Economic Equilibrium

In the field of Macroeconomics, economic equilibrium can be referred to as the price at which supply is known to equal the demand of the product. Alternatively, it can be said that it is the point at which hypothetical curves for both demand and supply tend to intersect. Equilibrium can also be known as a state in macroeconomics in which aggregate demand and aggregate supply tend to be in balance.