Economic equilibrium is a state or condition that occurs when the forces that drive the economy remain stable and do not change. In this situation, the supply and demand they equalize.
That is, economic equilibrium is achieved when supply and demand coincide. Thus, this equivalence tends to persist, as long as the external forces are not modified.
Importantly, economic equilibrium is known as market equilibrium. This equilibrium occurs at the point where the supply and demand curves intersect.
Economic equilibrium can occur in any market, both in the market for goods and services, as well as in the market for factors of production and in the money market.
How can you analyze the economic equilibrium?
The economic equilibrium can be analyzed from different approaches, the most important are:
1. The partial equilibrium
Undoubtedly, partial economic equilibrium is analyzed when the behavior of markets is studied individually and in isolation. To study and analyze the partial economic equilibrium, the ceteris paribus effect is taken into account. This, in order to isolate only two factors and everything else must remain constant.
Of course, only the equilibrium price and quantity in a particular market are considered in the partial analysis. But, with total independence from price and quantity variations in other markets, such as substitute and complementary products. Nor does it consider changes in macroeconomic variables, and for that reason the analysis is simpler.
For example, if we analyze the car market, if the price of cars increases from $ 30,000 to $ 35,000, the quantity demanded decreases from 100 to 75 and the quantity supplied increases from 100 to 125. Therefore, there will be an excess supply which pushes the price to fall and then stabilize again.
2. The general equilibrium
While, the study of general economic equilibrium simultaneously studies the behavior of all other markets and their interrelationships. Therefore, general equilibrium hopes to explain the behavior of supply, demand and price formation in an economy as a whole.
to. The general economic equilibrium relating markets for different goods
First, in general equilibrium, the market relationship of different goods can be analyzed, such as substitute and complementary products. For example, let’s continue with the previous case of cars that went up in price from $ 30,000 to $ 35,000.
Of course, this reduced the quantity demanded, but there are substitute products such as motorcycles. In this market we can expect the demand for motorcycles to increase because it covers the same transportation need and turns out to be a cheaper option for the consumer.
Likewise, we could consider the case of complementary products. If they are gasoline-powered cars and if people demand fewer vehicles, they don’t need to demand as much gasoline. Because of this, the demand for gasoline is reduced.
b. The general economic equilibrium relating different types of markets
Similarly, general economic equilibrium can be analyzed by relating different types of markets. For example, if the lending interest rate rises in the credit market, the quantity of credit demanded will decrease.
Of course, this has an impact on the market for goods and services. Since, if there is a low amount of credit demanded, there will be less investment. This will cause a contraction in the supply of goods or services, which will cause an increase in the prices of these goods and services.
On the other hand, it will have an effect on the job market. This, given that the decrease in the quantity demanded of credit also affects a decrease in investment by companies, leading to a contraction in the demand for labor. This will cause the price of the salary to decrease.
General equilibrium is the opposite of partial equilibrium, which only analyzes markets individually and in isolation.
3. The stable economic equilibrium
Then, stable economic equilibrium occurs when for some reason the economic equilibrium is lost and the same market forces come into operation to return to the initial equilibrium.
As an example, we could assume that the price of propane gas decreases from $ 50 to $ 40. This would cause an increase in the quantity demanded from 100 to 125 kWh and a decrease in the quantity supplied from 100 to 75 kWh, generating a shortage in the market. Therefore, market forces push to re-stabilize the price and match the quantity demanded and supplied.
4. The unstable economic equilibrium
Finally, unstable economic equilibrium occurs when, once it is out of equilibrium, market forces produce a departure from said stability instead of returning to the starting point (as in the previous section). See: Cobweb theorem
To conclude, we can say that the economic equilibrium can be analyzed in a partial and general way. It is partial when the analysis is done on the behavior of markets in isolation, and it is general when the analysis is done simultaneously between different markets. Likewise, it can be stable when, when equilibrium is lost, the same market forces manage to return to equilibrium. Instead, it is unstable when, losing balance, the market moves away from it.