The Economic equilibrium reference article from the English Wikipedia on 24-Jul-2004
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Economic equilibrium

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In economics, if a market for a product has attained the price where the amount supplied of a certain product equals the quantity demanded then it has "cleared." In most markets, this supply and demand balance is an economic equilibrium.

In this case, we see a static equilibrium in a market; economic equilibrium can exist in non-market relationships and be dynamic. It is also partial equilibrium, while equilibrium may be multi-market or general.

As in most usage (say, that of chemistry), in economics equilibrium means "balance," here between supply forces and demand forces: 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.

There is nothing inherently good or bad about equilibrium, so that it is mistake to attach normative meaning to this concept. That is, food markets may be in equilibrium at the same time that people are starving (because they cannot afford the high equilibrium price).

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) will lead to price cuts, which decrease the quantity supplied (by undermining the incentive to produce and sell the product) and increase the quantity demanded (by offering consumers bargains). This automatically abolishes the glut. Similarly, in an unfettered market, any excess demand (or shortage) will lead to price increases, which lead to cuts in the quantity demanded (as customers are priced out of the market) and increases in the quantity supplied (as the incentive to produce and sell a product rises). As before, the shortage disappears. This automatic abolition of market non-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 unemployment), as with the efficiency wage hypothesis in labor economics. In some ways parallel is the phenomenon of credit rationing, in which banks hold interest rates low in order to create an excess demand for loans, so that they can pick and choose whom to lend to. Further, economic equilibrium can correspond with monopoly, where the monopolistic firm maintains an artificial shortage in order to prop up prices and to maximize profits. Finally, Keynesian macroeconomics points to underemployment equilibrium, where a surplus of labor (i.e., cyclical unemployment) co-exists for a long time with a shortage of aggregate demand.

On the other hand, the Austrian School and Joseph Schumpeter maintained that in the short term there would never be any equilibrium as everyone was always trying to take advantage of the pricing system and so there was always some dynamism in the system. The free market's strength was not creating a static or a general equilibrium but instead in organising resources to meet individual desires and discovering the best methods to carry the economy forward.


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