Lecture : Market forces and Equilibrium

 Economic Equilibrium (Market equilibrium)

(I)Economic equilibrium is a condition or state in which economic
forces are balanced. In effect, economic variables remain unchanged
from their equilibrium values in the absence of external influences.

(II)Economic equilibrium is the combination of economic variables

(usually price and quantity) toward which normal economic
processes, such as supply and demand, drive the economy. The term
economic equilibrium can also be applied to any number of
variables such as interest rates or aggregate consumption spending.
The point of equilibrium represents a theoretical state of rest where
all economic transactions that should occur, given the initial state of
all relevant economic variables, have taken place.

(III)Economic equilibrium is a condition where market forces are

balanced, a concept borrowed from physical sciences, where
observable physical forces can balance each other.
(IV)The incentives faced by buyers and sellers in a market,
communicated through current prices and quantities drive them to
offer higher or lower prices and quantities that move the economy
toward equilibrium.
(V) Market Equilibrium in Product Market ,Labor Market , Money
Market, Capital Market with demand and supply forces.
Economic Equilibrium in the Real World
Market Equlibrium :
Y DD
SS
 D/S Q
X

Along X-axis , take quantity, along Y-axis ,Demand and Supply,

Market mechanism explains equilibrium with demand and supply
forces. Equilibrium is a fundamentally theoretical construct that
may never actually occur in an economy, because the conditions
underlying supply and demand are often dynamic and uncertain.
The state of all relevant economic variables changes constantly. The
economy chases after equilibrium with out every actually reaching
it. Entrepreneurs compete throughout the economy, using their
judgement to make educated guesses as to the best combinations of
goods, prices, and quantities to buy and sell. Because a market
economy rewards those who guess better, through the mechanism of
profits, entrepreneurs are in effect rewarded for moving the
economy toward equilibrium. The business and financial media,
price circulars and advertising, consumer and market researchers,
and the advancement of information technology all make
information about the relevant economic conditions of supply and
demand more available to entrepreneurs over time. This
combination of market incentives that select for better guesses about
economic conditions and the increasing availability of better
economic information to educate those guesses accelerates the
economy toward the correct equilibrium values of prices and
quantities for all the various goods and services that are produced,
bought, and sold.