THE CONCEPT of equilibrium in Economics is borrowed from physical sciences. Equilibrium is a state in which forces making for change in opposite directions are perfectly in balance so that there does not arise any tendency to change. It is a general concept which can be applied to any situation which is characterised by a set of interacting forces. Let us exemplify this:
A market will be in equilibrium if the quantities of the product which buyers want to buy at the prevailing price are exactly matched by the amount which sellers wish to sell. Demand and supply forces acting on price are opposite of each other and the price at which they become equal to each other is termed as the equilibrium price. In other words, the equilibrium of the market is defined by the price of the product at which quantity demanded equals the quantity supplied. At the price the market is fully cleared.
Similarly, a consumer is in a state of equilibrium when he spends his given (limited) income on goods and services he desires in such a way that his utility equals his disutility. This equality also gets translated into what is termed as the law of equi- marginal utility, or the principle of substitution in consumption.
We can also define/understand equilibrium by the help of common concepts as provided in the General Systems theory. The crux of this theory is that certain notions like system, parameter, equilibrium, state, stability etc are used to describe situations in many fields of study. A system may be defined as a pair of sets, together with a rule which specifies the relationship between subsets of the first set and subsets of the second set. The first set consists of inputs and the second set consists of outputs and the rule defines the relationship of inputs to outputs. If the presence of some sets of objects entails a specific conjunction of inputs with outputs, that is called a state of the system. For example, consider the system of light switch and a lamp. The inputs of this system are the two switch positions ‘up’ or ‘down’, the outputs are ‘light on’ or ‘light off’. Supposing that state of the system is determined by the position of the switch and then the equilibrium state of the system is a state such that, if the system is in that state, the rules that transform inputs to outputs ensure that the state will be maintained. In the switch and light example, if as a result of the ‘up’ position of the switch, the light gets on such a state is called the equilibrium state of the system since there are no rules that will change the switch position. Even the ‘down’ position determines an equilibrium state.
Lets us now look at the partial and general equilibrium:
In a given situation if we take its limited or partial views, the resulting equilibrium is termed as partial equilibrium. An overall or full view results in general equilibrium. The concept of partial equilibrium concept was propounded by Alfred Marshall and that of general equilibrium concept by Leon Walras. An example of a market system shall clarify the distinction between the two:
If we just look at one market, de-linking it from other markets by assuming that both price elasticities and income elasticities are zero, the resulting equilibrium will be partial equilibrium, but looking at least two markets together, and determining their simultaneous equilibrium leads to the general equilibrium of the given two markets. Whether the equilibrium is partial or it is general, whether we are looking at micro economics or whether we are looking at macro economics, whether we have a static model or we have a dynamic model, there are three distinct questions that invariably arise in all the equilibrium situations. These are:
In a single market model, the existence problem can be introduced by asking for the conditions on consumer and producer behaviour which ensure that demand and supply curves intersect in the positive quadrant. The uniqueness problem may be framed in terms of the smoothness (continuity) or convexity of the excess demand curve. The stability question clearly depends on the relationship between the slopes of the demand and supply curves. A stable equilibrium state is a state such that, if the system is not in that state, the rules are such that the equilibrium will be achieved. In other words, if derivations are made to disturb the equilibrium state, and if there are in-built forces within the system to bring it back to equilibrium state, it is said to be in stable equilibrium. In cases where the system moves away from the equilibrium state, it is said to be in unstable equilibrium, and in cases where the system attains a new equilibrium state, it is said to be in neutral equilibrium.
All these van also be demonstrated graphically.
We always strive to achieve equilibrium positions that are characterised by existence, uniqueness and stability. If any or all of these attributes are missing, we look back, change our assumptions, and start afresh such that the attributes become available.