Equilibrium

What Is Equilibrium?

Equilibrium in economics is a condition where all of the forces in play are balanced in such a way that whatever the situation happens to be, it would be expected to continue into the future without change if there were no outside disturbance to cause change to occur.

With supply and demand Opens in new window, the price Opens in new window and volume set would be expected to continue as far as the eye can see unless there were a change in underlying ceteris paribus Opens in new window conditions.

Similarly with an economy Opens in new window taken as a whole, things would be expected to continue without change unless something occurred to shift those forces which till then were in balance.

But here is the reality. Nothing in an economy is ever in equilibrium.

It is a condition that is never met because no economy or any part of it is ever in a situation where the factors affecting current conditions are stable.

Thinking about economies and equilibrium brings together two notions that really have nothing to do with each other.

Economies are always shifting, sometimes experiencing more turbulence than other times, but they are always shifting. There is no equilibrium.

The best definition of equilibrium is a condition where all expectations are met.

This is obviously a condition that could never exist in the real world.