Business, Legal & Accounting Glossary
Equilibrium occurs when a balance between supply and demand is realized. Equilibrium in economics is referred to as a state of stability. In this state, the economic forces are in balanced form and there is no influence of external forces. Equilibrium is a state in which the economic variables do not change and there is an absence of externalities.
The state of equilibrium is found in several aspects of economics. Any economy where equilibrium condition prevails is said to prosper well. Major types of equilibrium are as follows:
Market equilibrium is referred to as a state in which the goods produced is equal to the goods consumed. Price here remains the same and continues to remain the same until there is a change in supply or demand for goods.
Competitive market equilibrium is referred to as the state of stability that prevails in a market where there are flexible prices and many traders. Competitive market equilibrium includes a vector of prices and allocation is done in such a way that each trader maximizes his profit function.
General equilibrium is the study of supply, demand, and prices. This is a branch of microeconomics. Here consumers are assumed as price takers. They decide the price of the commodity. General equilibrium can be explained by using several theorems. First Fundamental Theorem, Second Fundamental Theorem and Sonnenschein-Mantel-Debreu Theorem are the major theorems of general equilibrium.
Lindahl equilibrium is a state of stability that prevails under a situation where Lindahl tax is imposed. The situation under Lindahl tax can be described as a situation where individuals pay for any public good according to the marginal benefits that they can draw from the public good. To obtain equilibrium conditions under Lindahl taxation there should be good knowledge of demand functions of both public and private goods for each individual.
Partial equilibrium is a state in an economy where the market is cleared of some specific goods. The clearance is obtained irrespective of influences of prices and quantities of goods that are either demanded or supplied in other markets. Thus, it can be said that the market clearance is obtained when the prices of all substitutes and complements, as well as income levels of consumers, are invariable.
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This glossary post was last updated: 29th March, 2020 | 3 Views.