Economic Equilibrium - Explained
What is Economic Equilibrium?
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Table of ContentsWhat is an Economic Equilibrium?How the Economic Equilibrium is UsedStates of economic equilibriumPricing and economic equilibriumBarriers to economic equilibriumAcademic Research on the Economic Equilibrium
What is an Economic Equilibrium?
Economic equilibrium, also known as market equilibrium, refers to an economic state where there occurs a balance between economic forces. As a result, there is no variation in economic variables with regards to equilibrium stats at a time when there are no external factors involved. Economic equilibrium is also referred to as a specific point where market forces of demand and supply for a given product are equal to each other at a specific equilibrium price. In other words, equilibrium takes place when there is an intersection or crossing over of demand and supply curves.
How the Economic Equilibrium is Used
Economic equilibrium refers to the point where economic variables associated with a specific product, sector, or the market achieve an optimum balance between the market forces of demand and supply, covered in the concerned item related expenses. Economists implement this term with different variables like the interest rate for attaining several objectives such as promoting the growth of financial and non-financial industry, or improving the rate of employment for a specific industry.
States of economic equilibrium
Economic equilibrium can be seen in two different states: static and dynamic. Static equilibrium, as the name suggests, doesnt undergo any changes and remains consistent over a period of time. However, the stability of dynamic equilibrium relies on equal yet opposing market forces. Also, one can observe economic equilibrium either in one or different markets.
Pricing and economic equilibrium
Considering the concept of product pricing, equilibrium takes place at a stage where product point arrives at a point where the product demand at that specific price becomes equal to the production levels, or the related present supply. However, it doesnt mean that everyone who is having resources to buy the product they want. It refers to the point at which people who have the purchasing capacity for the product will utilize the opportunity for buying it.
Barriers to economic equilibrium
Several factors such as changes in consumer tastes and interest can act as a disruption for the economic equilibrium. This ultimately reduces the demand, and exaggerates the condition of market supply. In such cases, there exists a non-permanent stage of market disequilibrium that is gradually rectified once the economy reaches a new equilibrium. Additionally, there are many huge events causing equilibrium disruption in the economy. For instance, the major 2008 global financial crisis created prominent imbalances in the housing sector. Also, a natural calamity or disaster can also cause disruptions in the equilibrium stage of economy. For instance, if a major manufacturing equipment catches fire, the other resources may not be adequate to meet demand in the long-run. On the other hand, if a particular state gets caught in floods, the affected people will shift their spending priorities towards new concerns like replacing damaged goods with new ones. In case, temporary unemployment occurs as a consequence of a natural calamity, consumers will not spend unnecessarily on the products that are not highly required, therefore creating an increase in supply.
Academic Research on the Economic Equilibrium