Supply and demand are two key players of economics. Market equilibrium is the state where these two forces are balanced i.e. when the quantity supplied is equal to the quantity demanded. This is also referred to as economic equilibrium. Expounding on the same lines, it can also be said that this condition is attained when a competitive price is established in the market also known as the equilibrium price or market clearing price. Read on as we elaborate on the various aspects of this economic state of equilibrium.
Types of Equilibrium
Static Equilibrium: A state of supply and demand balance maintained irrespective of the time factor is called static equilibrium. It is a state where the consumer is satisfied with the associated expenditure and the quality delivered and where the seller is satisfied with the profit earned and does not intend to change its prices. It also marks a state where no new firms enter this section of business, and no present firms are in a mood to change their modus operandi that can contribute to the disruption to the equilibrium.
Dynamic Equilibrium: Profits, prices, and quantities seldom remain in static state. Technology and efficiency are factors that contribute to bringing about a change in the state of equilibrium. These calls for an element of dynamicity in the economic parameters to remain in the state of equilibrium, referred to as dynamic equilibrium.
Partial Equilibrium: This type or method of equilibrium considers the change in any one of the sections of the economy taking all other factors as constant. The different sections of the economy in this spot are consumer, manufacturer, firm and industry.
- Maximum satisfaction in terms of price and quantity on the buyer’s front indicates consumer equilibrium.
- Maximized aggregate profit on the manufacturer’s front indicates the producer equilibrium.
- When a firm attains an optimum level of resources, its utilization, and profit, it is referred to as firm’s equilibrium. Similarly when in an industry no new firms are offered to get any space for incentives, it is referred as industry’s equilibrium.
General Equilibrium: This is a theoretical model that describes a market situation that can attain equilibrium in product markets and factor markets. This condition is attained when the price of commodity reaches its optimum value resulting in demand and supply balance, and simultaneously optimal factor prices give way to balanced factor demand and supply. The resulting equilibrium state is characterized by the maximum satisfaction on the consumer front and supplied commodities being cleared from the market in due time to seller’s delight.
Factors Leading to Disruptions
- Labor: Labor forms the core of any economy and change in this segment can cause changes in the supply-demand balance. Constraints that force changes to this section are laws and socio-economic factors.
- Factor Markets: Change in equilibrium in any of the market participants or supporting markets can cause disruption in the market equilibrium.
- Credit Rationing: This refers to a situation where demand exceeds the supply in the credit market. Lenders are unwilling to lend money to the borrowers even at higher interest rates. This is due to the absence of equilibrium in the price market that ripples into other industries.