Economic equilibrium
In economics, economic equilibrium
is a state of the world where economic forces are balanced and in the absence
of external influences the (equilibrium) values of economic variables will not
change. For example, in the standard text-book model of perfect competition,
equilibrium occurs at the point at which quantity demanded and quantity
supplied are equal. Market equilibrium in this case refers to a condition where
a market price is established through competition such that the amount of goods
or services sought by buyers is equal to the amount of goods or services
produced by sellers. This price is often called the competitive price or market
clearing price and will tend not to change unless demand or supply changes.
Properties of equilibrium
Three basic properties of
equilibrium in general have been proposed by Huw Dixon, these are:
Equilibrium property P1: The
behaviour of agents is consistent.
Equilibrium property P2: No agent
has an incentive to change its behaviour.
Equilibrium Property P3:
Equilibrium is the outcome of some dynamic process (stability).
Example: The competitive
equilibrium.
In a competitive equilibrium,
supply equals demand. Property P1 is satisfied, because at the equilibrium
price the amount supplied is equal to the amount demanded. Property P2 is also
satisfied. Demand is chosen to maximize utility given the market price: no one
on the demand side has any incentive to demand more or less at the prevailing
price. Likewise supply is determined by firms maximizing their profits at the
market price: no firm will want to supply any more or less at the equilibrium
price. Hence, agents on neither the demand side nor the supply side will have
any incentive to alter their actions.
To see whether Property P3 is
satisfied, consider what happens when there the price is above the equilibrium.
In this case there is an excess supply, with the quantity supplied exceeding
that demanded. This will tend to put downward pressure on the price to make it
return to equilibrium. Likewise where the price is below the equilibrium point
there is a shortage in supply leading to an increase in prices back to
equilibrium. Not all equilibria are "stable" in the sense of
Equilibrium property P3. It is possible to have competitive equilibria that are
unstable. However, if an equilibrium is unstable, it raises the question of how
you might get there. Even if it satisfies properties P1 and P2, the absence of
P3 means that the market can only be in the unstable equilibrium if it starts
off there.
In most simple microeconomic
stories of supply and demand in a market a static equilibrium is observed in a
market; however, economic equilibrium can be also be dynamic. Equilibrium may
also be economy-wide or general, as opposed to the partial equilibrium of a
single market. Equilibrium can change if there is a change in demand or supply
conditions. For example, an increase in supply will disrupt the equilibrium,
leading to lower prices. Eventually, a new equilibrium will be attained in most
markets. Then, there will be no change in price or the amount of output bought
and sold — until there is an exogenous shift in supply or demand (such as
changes in technology or tastes). That is, there are no endogenous forces
leading to the price or the quantity.
Example: Nash equilibrium
The Nash equilibrium is widely used
in economics as the main alternative to competitive equilibrium. It is used
whenever there is a strategic element to the behavior of agents and the
"price taking" assumption of competitive equilibrium is
inappropriate. The first use of the Nash equilibrium was in the Cournot duopoly
as developed by Antoine Augustin Cournot in his 1838 book. Both firms produce a
homogenous product: given the total amount supplied by the two firms, the
(single) industry price is determined using the demand curve. This determines
the revenues of each firm (the industry price times the quantity supplied by
the firm). The profit of each firm is then this revenue minus the cost of
producing the output. Clearly, there is a strategic interdependence between the
two firms. If one firm varies its output, this will in turn affect the market
price and so the revenue and profits of the other firm. We can define the
payoff function which gives the profit of each firm as a function of the two
outputs chosen by the firms. Cournot assumed that each firm chooses its own
output to maximize its profits given the output of the other firm. The Nash
equilibrium occurs when both firms are producing the outputs which maximize
their own profit given the output of the other firm.
In terms of the equilibrium
properties, we can see that P2 is satisfied: in an Nash equilibrium, neither
firm has an incentive to deviate from the Nash equilibrium given the output of
the other firm. P1 is satisfied since the payoff function ensures that the
market price is consistent with the outputs supplied and that each firms
profits equal revenue minus cost at this output.
Is the equilibrium stable as
required by P3? Cournot himself argued that it was stable using the stability
concept implied by best response dynamics. The reaction function for each firm
gives the output which maximizes profits (best response) in terms of output for
a firm in terms of a given output of the other firm. In the standard Cournot model
this is downward sloping: if the other firm produces a higher output, your best
response involves producing less. Best response dynamics involves firms
starting from some arbitrary position and then adjusting output to their
best-response to the previous output of the other firm. So long as the reaction
functions have a slope of less than -1, this will converge to the Nash
equilibrium. However, this stability story is open to much criticism. As Dixon
argues: "The crucial weakness is that, at each step, the firms behave
myopically: they choose their output to maximize their current profits given
the output of the other firm, but ignore the fact that the process specifies
that the other firm will adjust its output...". There are other concepts
of stability that have been put forward for the Nash equilibrium, evolutionary
stability for example.
Interpretations
In most interpretations, classical
economists such as Adam Smith maintained that the free market would tend
towards economic equilibrium through the price mechanism. That is, any excess
supply (market surplus or glut) would lead to price cuts, which decrease the
quantity supplied (by reducing the incentive to produce and sell the product)
and increase the quantity demanded (by offering consumers bargains),
automatically abolishing the glut. Similarly, in an unfettered market, any
excess demand (or shortage) would lead to price increases, reducing the
quantity demanded (as customers are priced out of the market) and increasing in
the quantity supplied (as the incentive to produce and sell a product rises).
As before, the disequilibrium (here, the shortage) disappears. This automatic
abolition of non-market-clearing situations distinguishes markets from central
planning schemes, which often have a difficult time getting prices right and
suffer from persistent shortages of goods and services.
This view came under attack from at
least two viewpoints. Modern mainstream economics points to cases where equilibrium
does not correspond to market clearing (but instead to unemployment), as with
the efficiency wage hypothesis in labor economics. In some ways parallel is the
phenomenon of credit rationing, in which banks hold interest rates low to
create an excess demand for loans, so they can pick and choose whom to lend to.
Further, economic equilibrium can correspond with monopoly, where the
monopolistic firm maintains an artificial shortage to prop up prices and to
maximize profits. Finally, Keynesian macroeconomics points to underemployment
equilibrium, where a surplus of labor (i.e., cyclical unemployment) co-exists
for a long time with a shortage of aggregate demand.
On the other hand, the Austrian
School and Joseph Schumpeter maintained that in the short term equilibrium is
never attained as everyone was always trying to take advantage of the pricing
system and so there was always some dynamism in the system. The free market's
strength was not creating a static or a general equilibrium but instead in organising
resources to meet individual desires and discovering the best methods to carry
the economy forward.
Solving for the competitive equilibrium price
To solve for the equilibrium price,
one must either plot the supply and demand curves, or solve for their equations being equal (Qs = Qd).
An example may be:
In the diagram, depicting simple
set of supply and demand curves, the quantity demanded and supplied at price P
are equal.
At any price above P supply exceeds
demand, while at a price below P the quantity demanded exceeds that supplied.
In other words, prices where demand and supply are out of balance are termed
points of disequilibrium, creating shortages and oversupply. Changes in the
conditions of demand or supply will shift the demand or supply curves. This
will cause changes in the equilibrium price and quantity in the market.
Consider the following demand and
supply schedule:
Price ($) Demand Supply
8.00 6,000
18,000
7.00 8,000 16,000
6.00 10,000 14,000
5.00 12,000 12,000
4.00 14,000 10,000
3.00 16,000 8,000
2.00 18,000 6,000
1.00 20,000 4,000
The equilibrium price in the market
is $5.00 where demand and supply are equal at 12,000 units
If the current market price was
$3.00 – there would be excess demand for 8,000 units, creating a shortage.
If the current market price was
$8.00 – there would be excess supply of 12,000 units.
When there is a shortage in the
market we see that, to correct this disequilibrium, the price of the good will
be increased back to a price of $5.00, thus lessening the quantity demanded and
increasing the quantity supplied thus that the market is in balance.
When there is an oversupply of a
good, such as when price is above $6.00, then we see that producers will
decrease the price to increase the quantity demanded for the good, thus
eliminating the excess and taking the market back to equilibrium.
Influences changing price
A change in equilibrium price may
occur through a change in either the supply or demand schedules. For instance,
starting from the above supply-demand configuration, an increased level of
disposable income may produce a new demand schedule, such as the following:
Price ($) Demand Supply
8.00 10,000 18,000
7.00 12,000 16,000
6.00 14,000 14,000
5.00 16,000 12,000
4.00 18,000 10,000
3.00 20,000 8,000
2.00 22,000 6,000
1.00 24,000 4,000
Here we see that an increase in
disposable income would increase the quantity demanded of the good by 4,000
units at each price. This increase in demand would have the effect of shifting
the demand curve rightward. The result is a change in the price at which
quantity supplied equals quantity demanded. In this case we see that the two
now equal each other at an increased price of $6.00. Note that a decrease in
disposable income would have the exact opposite effect on the market
equilibrium .
We will also see similar behaviour
in price when there is a change in the supply schedule, occurring through
technological changes, or through changes in business costs. An increase in
technological usage or know-how or a decrease in costs would have the effect of
increasing the quantity supplied at each price, thus reducing the equilibrium
price. On the other hand, a decrease in technology or increase in business
costs will decrease the quantity supplied at each price, thus increasing equilibrium
price.
The process of comparing two static
equilibria to each other, as in the above example, is known as comparative
statics. For example, since a rise in consumers' income leads to a higher price
(and a decline in consumers' income leads to a fall in the price — in each case
the two things change in the same direction), we say that the comparative
static effect of consumer income on the price is positive. This is another way
of saying that the total derivative of price with respect to consumer income is
greater than zero.
Dynamic equilibrium
Whereas in a static equilibrium all
quantities have unchanging values, in a dynamic equilibrium various quantities
may all be growing at the same rate, leaving their ratios unchanging. For
example, in the neoclassical growth model, the working population is growing at
a rate which is exogenous (determined outside the model, by non-economic
forces). In dynamic equilibrium, output and the physical capital stock also
grow at that same rate, with output per worker and the capital stock per worker
unchanging. Similarly, in models of inflation a dynamic equilibrium would
involve the price level, the nominal money supply, nominal wage rates, and all
other nominal values growing at a single common rate, while all real values are
unchanging, as is the inflation rate.
The process of comparing two
dynamic equilibria to each other is known as comparative dynamics. For example,
in the neoclassical growth model, starting from one dynamic equilibrium based
in part on one particular saving rate, a permanent increase in the saving rate
leads to a new dynamic equilibrium in which there are permanently higher
capital per worker and productivity per worker, but an unchanged growth rate of
output; so it is said that in this model the comparative dynamic effect of the
saving rate on capital per worker is positive but the comparative dynamic
effect of the saving rate on the output growth rate is zero.
कोई टिप्पणी नहीं:
एक टिप्पणी भेजें