Equilibrium and disequilibrium, Macroeconomics

 

Equilibrium and Disequilibrium 

In physical sciences, equilibrium is a state of balance between opposing forces or actions. The meaning of equilibrium in economic theory is exactly the same as it is in physical sciences. Again, in both the fields, disequilibrium means the absence of equilibrium. Values of economic variables usually keep changing over time; therefore, the state of balance that defines equilibrium may perhaps be better expressed as a state of no change over time. One must bear in mind that economic equilibrium does not mean a motionless state in which no action takes place; rather, it is a state in which there is action, but the action is of a repetitive nature. Each time period exactly duplicates the preceding time period. Even though the forces acting on the system may be in a continuous state of change, the state of equilibrium is maintained as long as the net effect of these changing forces does not disturb the established position of equilibrium.To illustrate the above, consider from microeconomics the standard simple upward sloping supply curve and downward sloping demand curve for a commodity (see Figure 2.1). If PE is the equilibrium price which equates the quantity demanded and the quantity supplied, the same equilibrium quantity QE is bought and sold in every time period if the supply and demand curves are the same in each time period. The market is in balance but not motionless. Sellers keep bringing the commodity to the market and the buyers keep purchasing it. In a market where the supply and demand curves are continually shifting, the market may be in a constant state of disequilibrium. In such a situation, the market is constantly moving toward equilibrium, but the equilibrium position changes before the market gets to it. However, even for markets in continuous disequilibrium, the concept of equilibrium is a valuable analytic tool. If at any point in time an equilibrium position exists (though the market may not be at this position), this at least indicates the direction in which the system is going to move.

352_Equilibrium and Disequilibrium.jpg

 

The ideas of stock equilibrium and flow equilibrium are very important. Before trying to understand these concepts from macroeconomics, consider the following simple example. Suppose, water is flowing through a pipe into a reservoir at the rate of 5,000 gallons per day. Water is also flowing out of the reservoir at the rate of 3,000 gallons per day. These flows would be described as equilibrium flows as long as they do not vary in size from day-to-day over the period of time considered. However, this flow equilibrium produces stock disequilibrium. If the stock of water were measured at the same point in time each day, we would find the stock of water to be growing at the rate of 2,000 gallons per day. Therefore, stock disequilibrium is logically consistent with flow equilibrium.

Now for an example from macroeconomics. Suppose that gross investment in the economy is constant at 10,000 per year and the capital consumption is constant at the rate of 2,000 per year. These two flows determine a flow equilibrium of a net addition of 8,000 units of capital stock to the economy. Since the capital stock of the economy is growing, we have stock disequilibrium. When the capital stock is increasing, we have the case of a growing economy. In contrast, an economy in which the gross investment and capital consumption are the same, the capital stock is constant, and we have the case of a stationary economy. Flow equilibrium is essentially a short run concept, stock equilibrium is a long run concept. Because flow equilibrium is necessary for stock equilibrium, short run equilibrium is, therefore, necessary for long run equilibrium. For short run equilibrium, the disequilibriating effects that flows produce on stocks are disregarded and instead the focus is only on the conditions necessary to achieve flow equilibrium. However, for long run equilibrium, the counter effects produced on flows by disequilibrium in stocks are considered, and for full equilibrium we need both flow and stock equilibrium.

 

 

Posted Date: 9/11/2012 5:03:52 AM | Location : United States







Related Discussions:- Equilibrium and disequilibrium, Assignment Help, Ask Question on Equilibrium and disequilibrium, Get Answer, Expert's Help, Equilibrium and disequilibrium Discussions

Write discussion on Equilibrium and disequilibrium
Your posts are moderated
Related Questions
Financing of Fiscal Deficit: Since the size of balanced budget of the multiplier is small, it is not for all time possible to get the needed demand expansion by raising the exp

In "Kitchen Nightmares", Chef Gordon Ramsa visits struggling restaurants and gives the owners of the restaurant a number of recommendations intended to reverse the restaurant's pro

define the economic principle of opportunity cost explain whether spending 17.9% of gdp is too much or too little to spend on healthcare

What is the impact on the economy if price ceiling or price floor were removed? Ans) Price ceiling is government system or laws setting price floors or ceilings that forbid the

You are given the following information about an economy: Gross Investment  =                                                         40 Govt. purchases of goods & service =

An economy's IS and LM curves are given by the following equations: with Y indicating output (income), c indicating the marginal propensity to consume, I investment, G gove

Why does a production possibilities frontier with increasing opportunity costs have a bowed-out shape?   The curve is bowed-out because some resources are better suited for the

The price of gasoline has recently come down as has the quantity. Show graphically and explain what might have caused this.

How can franchises ensure their products are appropriate for international markets?

Q. What is Demand for money? Demand for money The demand for money depends negatively on R and positively on the Yin the IS-LM model As fo