Equilibrium Condition

Equilibrium Condition

Equilibrium, the condition in which there is no inducement to change.

Equilibrium in a market for commodities, or capital, or labour, is reached when the supply coming on to the market at any given price is equal to the demand at that price. Since the number of units bought at a price must necessarily equal the number sold at that price, supply and demand in this sense must be equal at every price. But there is only one price at which there is equilibrium in the sense that at that price the amount that suppliers wish to supply is just equal to the amount that consumers are freely prepared to buy. At a lower price suppliers would supply less than this number and consumers would want to buy more than this number so that the price would tend to rise; at a higher price suppliers would supply more and consumers buy less so that the price would tend to fall. Only at the equilibrium price are the two equal; only at this price are buyers' preferences consistent with those of sellers.

Much economic analysis of what determines prices and quantities of commodities and services consists of establishing the conditions of equilibrium on the basis of certain assumptions. For example, to explain the quantity of a commodity demanded at any price requires a statement of the individual consumer's conditions of equilibrium. This follows from two basic assumptions: (a) that individuals always spend their incomes in such a way that utility is maximized; (b) that relative to other goods the additional utility from additions of a commodity diminishes the larger the quantities possessed. Given the prices of all commodities, a consumer may be said to be in equilibrium when he is distributing his income among various commodities so that an additional (small) unit of expenditure would yield the same additional (marginal) utility from all of them. Full market equilibrium further requires that for each commodity price is such as will generate just enough demand to clear the market of supplies forthcoming at that price. On the supply side, given the basic assumption that individual producers try to produce and sell in such a way as to maximize their net profit, the conditions of equilibrium depend on the assumptions made about the behaviour of production costs and sales revenue as the output of an individual producer is changed. Again, full market equilibrium for a commodity requires the further condition that the price is one at which every producer is in equilibrium but also the total of output is sufficient to satisfy the total demands of all consumers at that price.

ExamplesEconomist - Economist Online


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