Equilibrium

In economics, equilibrium refers to situations in which individuals, firms, markets, and systems are operating at optimal level and there is no current need or motive to change. One analogy to equilibrium is dropping a marble into a bowl. The marble will roll back and forth but will eventually come to rest. Unless something disturbs the bowl, the tendency will be for the marble to stay in the same place. Similarly, when circumstances change for individuals, firms, or societies, economic systems adjust to attempt to attain a new equilibrium. At the individual level, equilibrium is attained when consumers allocated their INCOME among available choices to obtain the maximum level of satisfaction. Also at the individual level, a firm achieves equilibrium when it chooses levels of inputs and outputs that maximize PROFITs, given current market conditions. Market equilibrium is portrayed by the Marshallian cross, named after British economist Alfred Marshall. Market equilibrium is achieved where there is a marketclearing price, meaning a price at which those consumers who want to purchase the PRODUCT can do so, and those producers who want to sell their product at that price can find buyers. It is the price at which quantity demanded equals quantity supplied, ceteris paribus (other things being equal). Macroeconomic equilibrium occurs when all the markets within the economic system are in balance. Like market equilibrium, macroeconomic equilibrium is a price level at which aggregate demand equals aggregate supply. Changes in monetary and FISCAL POLICY, consumer and business decisions, and global social, political, and climatic conditions are major causes of changes in equilibrium of economic systems. Realistically, economic forces are in constant change. In the time it takes to read this entry, markets, economic policies, and individual and household priorities are changing. Nevertheless, equilibrium is an important concept portraying the direction of efforts within economic systems. A story in the Wall Street Journal once described pricing activity by airline companies, noting that managers changed 1 million airline-ticket prices each day. These firms were adjusting their price, attempting to maximize profits depending on market forces: the number of people who bought tickets that day, the time until the flight departed, the actions of competing firms, the capacity of the plane, and past experience with last-minute DEMAND. While most markets do not change as rapidly as that for airline tickets, markets are nonetheless constantly changing, and therefore equilibrium, the state of balance, is also changing.