Give the meaning of the term equilibrium
The term **equilibrium** in economics refers to a state in which market forces such as supply and demand are balanced. At equilibrium, the quantity of goods or services demanded by consumers is equal to the quantity supplied by producers. This balance results in a stable market condition where there is no inherent tendency for change unless external factors disturb the equilibrium.
### Key Features of Equilibrium:
1. **Market Clearing:**
- At the equilibrium price, the quantity demanded by consumers exactly matches the quantity supplied by producers, meaning there is no surplus or shortage.
2. **Stable Price and Quantity:**
- The equilibrium price and quantity remain stable as long as external conditions (such as consumer preferences, production costs, or external shocks) remain unchanged.
3. **No Incentive for Change:**
- Both buyers and sellers are satisfied at the equilibrium price and quantity. Buyers are purchasing the amount they desire at a price they are willing to pay, and sellers are selling the amount they want to produce at a price that covers their costs and provides profit.
### Diagram of Equilibrium:
A typical supply and demand diagram can illustrate equilibrium:
```
Price
|
| S
| /
| /
| /
| /
| /
| /
| /
| /
| /
|/__________E_________ Quantity
\
\
\
\
D
```
In this diagram:
- **D** represents the demand curve, which shows the quantity demanded at various prices.
- **S** represents the supply curve, which shows the quantity supplied at various prices.
- **E** represents the equilibrium point where the supply and demand curves intersect.
- The equilibrium price (**P\(_E\)**) is the price at which the quantity demanded equals the quantity supplied.
- The equilibrium quantity (**Q\(_E\)**) is the quantity bought and sold at the equilibrium price.
### Types of Equilibrium:
1. **Static Equilibrium:**
- Refers to a situation where the equilibrium price and quantity remain unchanged over time.
2. **Dynamic Equilibrium:**
- Refers to a situation where the equilibrium price and quantity change over time due to shifts in supply and demand, but the market consistently moves towards a new equilibrium.
### Factors Affecting Equilibrium:
- **Shifts in Demand:**
- Changes in consumer preferences, income levels, prices of related goods (substitutes and complements), and expectations can shift the demand curve, leading to a new equilibrium.
- **Shifts in Supply:**
- Changes in production costs, technology, number of suppliers, and expectations can shift the supply curve, resulting in a new equilibrium.
### Conclusion:
Equilibrium is a crucial concept in economics that ensures resources are allocated efficiently in a market. Understanding equilibrium helps economists and policymakers predict how changes in external conditions will affect prices and quantities in the market, thereby aiding in the formulation of effective economic policies.
