Economic Equilibrium

Economic equilibrium is a fundamental concept in economic theory. In the context of an economic model, equilibrium occurs when all variables satisfy the model’s conditions and constraints.

Disequilibrium, on the other hand, describes a state where variables fail to meet the model’s constraints and conditions.

Types of Economic Equilibrium

There isn’t a single definition of economic equilibrium.

Depending on variable magnitudes and contextual factors, different types of economic equilibrium can be identified.

• Microeconomic Equilibrium. This type of equilibrium involves balance between microeconomic variables, focusing on the individual actions of a single economic agent.
• Macroeconomic Equilibrium. Macroeconomic equilibrium concerns balance between macroeconomic variables, relating to the collective behavior of broader economic entities (such as firms, governments, consumers) or the entire economic system.
• Static Equilibrium. Static equilibrium is achieved when all model variables are aligned with a single time unit. Comparative statics, which analyze changes between static states, are included here.
• Dynamic Equilibrium. Dynamic equilibrium describes a state that evolves over time and can be influenced by economic shifts. This form of equilibrium may be stable or unstable and is analyzed in econometrics and recent political economy theories.
• Partial Equilibrium. Partial equilibrium occurs within a single market, assuming other markets and system variables remain constant, often simplifying analysis by isolating one market's dynamics.
• General Equilibrium. General equilibrium occurs when all markets in an economy are simultaneously in balance. General equilibrium theory posits a single, stable point where all markets achieve equilibrium together.
• Multiple Equilibria. This concept refers to models with more than one possible equilibrium point, often explored in studies on unstable equilibria.
• Market Equilibrium. Market equilibrium is a form of partial equilibrium where demand meets supply at a specific price point (known as the equilibrium price).
• Competitive Firm Equilibrium. This equilibrium arises from a firm's production decisions within a perfectly competitive market.
• Consumer Equilibrium. Consumer equilibrium represents a partial microeconomic equilibrium where a consumer chooses the quantity of goods to purchase based on personal preferences.

The Concept of Equilibrium in Economic Thought

Economic equilibrium has been explored by various economic theorists.

The concept was first formally introduced by classical economist Adam Smith with his notion of the “invisible hand.”

The invisible hand is a metaphor describing how individual actions collectively determine market prices (invisible hand).

Classical economists later revisited the idea of equilibrium to unify theories on equilibrium and resource allocation.

Neoclassical marginalist economists expanded the concept into political economy, drawing on the principles of physical and mathematical equilibrium.