THE CONCEPT OF EQUILIBRIUM

THE CONCEPT OF EQUILIBRIUM What is equilibrium? Equilibrium is a situation which occurs when there is a balance between quantity demanded and supplied. It represents a situation where there is no tendency to change.

what is equilibrium?

In economics, equilibrium refers to a state of balance or stability in a market where the quantity of goods or services demanded by consumers is equal to the quantity supplied by producers. This is also known as market equilibrium or price equilibrium.

Market equilibrium is achieved through the interaction of supply and demand. The demand for a product or service represents the quantity that buyers are willing and able to purchase at a certain price, while the supply represents the quantity that sellers are willing and able to offer for sale at a certain price. The market price at which the quantity supplied equals the quantity demanded is known as the equilibrium price or market-clearing price.

At this equilibrium price, all buyers who are willing and able to pay that price will be able to purchase the product, and all sellers who are willing and able to sell at that price will be able to sell their entire inventory. There is no excess demand or supply, and the market is in a state of balance.

If the price is above the equilibrium price, there will be a surplus of goods, as the quantity supplied will exceed the quantity demanded. This surplus will put downward pressure on the price, causing it to fall until the market reaches equilibrium. Conversely, if the price is below the equilibrium price, there will be a shortage of goods, as the quantity demanded will exceed the quantity supplied. This shortage will put upward pressure on the price, causing it to rise until the market reaches equilibrium.

Overall, the concept of equilibrium in economics is important as it helps to understand how markets function and how prices are determined. It is also used to analyze the effects of changes in supply or demand on market prices and quantities and to identify opportunities for market interventions and policies that can improve market outcomes.

The price which equates demand with supply is equal to the equilibrium price. The existence of equilibrium price gives rise to the third law of demand and
supply which states that: โ€œThe equilibrium price

However, a temporary deviation either in the form of shortage or surplus has to be corrected by forces of demand and supply, which are capable of restoring equilibrium to its normal position. Changes in demand and supply lead to price changes.

 Once there is a change in either demand or supply, the initial equilibrium will be disrupted and a new equilibrium will be created.

Possible causes to Changes in equilibrium

Changes in equilibrium are caused by the same factors that cause changes in demand and supply. They include:

  • Increase in demand: If the demand for a commodity increases while supply remains constant, there will be an excess demand over supply. This will lead to an increase in the equilibrium price of the commodity as well as an increase in the equilibrium quantity.

 There is a shift in the demand curve to the right due to an increase in demand. It shifted from D1D1 to D2D2 and the price increased from P1 to P2, the new equilibrium position is at the price P2 and quantity Q2.

(2)        Decrease in demand: If the demand for a commodity decreases while supply remains

constant there will be an excess of supply over demand. This results in a decrease in the equilibrium price and quantity of the commodity.

 with a decrease in demand, the demand curve shifts to the left from D1D1 to D2D2 and the price decreases from P3 to P2. The new equilibrium position is at the price of P2 and quantity Q3.

Note: The increase and decrease in demand as explained above give rise to the fourth law of demand and supply, which states that โ€œAn increase in demand will cause an increase in both the equilibrium price and quantity supplied, while a decrease in demand will cause both the equilibrium price and the quantity supplied to fall.

  • Increase in supply: If supply increases while demand remains constant, there will be an excess of supply over demand. This will bring about a decrease in the equilibrium price of the commodity and an increase in the equilibrium quantity.

 an increase in supply makes the curve shift to the right from S1S1 to I the price to fall from P2 to P1. Here, the position is at the price P1 quantity Q2.

  • Decrease in supply: A decrease in supply without any change in demand will lead to excess demand over supply making the equilibrium price increase and a decrease in equilibrium quantity.

 the supply curve shifts to the left from S1S1 to S2S2. The price increases from P1 to P2. The new position is at the price P2 and quantity Q1.

Note: The increase and decrease in supply as explained above give rise to the fifth law of demand and supply, which states that: โ€œAn increase in the supply of a commodity will cause the equilibrium price to fall and the quantity demanded to increase, while a decrease in supply will cause the equilibrium price to rise but the quantity demanded to fall.โ€

Price stability refers to a situation where the general level of prices in an economy remains relatively constant over time. In other words, prices neither rise nor fall significantly, and the rate of inflation is low and predictable.

Maintaining price stability is one of the key goals of monetary policy in most countries. Central banks use various tools, such as adjusting interest rates, to control the money supply and influence inflation. Price stability is important because it helps to promote economic growth and stability, and it provides a stable environment for businesses and consumers to plan and make decisions.

When prices are unstable and fluctuate rapidly, it can lead to uncertainty and economic volatility. For example, if prices are rising rapidly, consumers may rush to purchase goods and services before prices go up further, leading to inflationary pressures. On the other hand, if prices are falling rapidly, businesses may delay investment and hiring decisions, leading to economic stagnation.

Overall, maintaining price stability is a key objective of economic policy, and it requires a combination of sound monetary policy, fiscal policy, and supply-side policies that promote productivity and growth.

Price fluctuation refers to the changes in the prices of goods and services over time due to changes in supply and demand. These fluctuations can occur on both a short-term and long-term basis.

Short-term price fluctuations are typically caused by changes in supply or demand that are temporary in nature. For example, a temporary increase in demand for a particular product may cause prices to rise, while a temporary oversupply of a product may cause prices to fall.

Long-term price fluctuations, on the other hand, are typically caused by structural changes in the economy. For example, a shift in consumer preferences towards a particular product may cause prices to rise over the long term, while advances in technology that increase productivity may cause prices to fall over time.

Price fluctuations can have significant impacts on the economy and on individual consumers and businesses. For example, sudden spikes in the price of oil can lead to increased costs for businesses and higher prices for consumers, while falling prices can result in lower profits for producers and potential job losses. As such, economists and policymakers often monitor price fluctuations closely and may take actions to mitigate their impact on the economy.

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