Equilibrium

Definition

Equilibrium is the state in which market supply and demand balance each other so that prices become stable. When supply equals demand at a given price, there is no tendency for price to change — that price is the equilibrium price and the associated quantity is the equilibrium quantity.

Key takeaways

• Equilibrium occurs where supply equals demand.
• In equilibrium, agents have no incentive to change behavior; prices tend to move toward, but often fluctuate around, equilibrium.
• Disequilibrium happens when supply and demand are out of balance, causing shortages or surpluses.
• Various equilibrium concepts exist (market, general, Nash, intertemporal, etc.), each useful for different economic analyses.
• Real-world factors (monopolies, cartels, policy, frictions) can prevent or distort equilibrium.

How equilibrium forms

If price is above equilibrium, supply exceeds demand (surplus), putting downward pressure on price. If price is below equilibrium, demand exceeds supply (shortage), pushing price up. These adjustments—buyers reacting to price and sellers adjusting production—move markets toward an equilibrium level. In practice, prices typically fluctuate around that level rather than remaining perfectly constant.

Special considerations

• Free-market forces tend to push toward equilibrium, but market power (monopolies, cartels) can hold prices artificially high by restricting supply.
• Equilibrium is a descriptive concept, not necessarily a desirable normative outcome. Markets can be at equilibrium while producing socially harmful results (for example, markets that were in equilibrium during famines still resulted in widespread suffering).

Disequilibrium

Disequilibrium is any state where supply and demand are not balanced. It can be:
* Short-term and sudden (e.g., supply chain disruption that reduces availability).
* Persistent and structural (e.g., labor markets affected by regulation or wage rigidities).
Disequilibrium in one market can spill into others (for example, transportation shortages affecting commodity supply).

Types of equilibrium

• Economic equilibrium — any balanced state in the economy (prices, employment, interest rates).
• Competitive equilibrium — equilibrium reached through competition among buyers and sellers.
• General equilibrium — simultaneous equilibrium across all markets in an economy (Walrasian framework).
• Underemployment equilibrium — a persistent level of unemployment compatible with equilibrium (highlighted in Keynesian analysis).
• Lindahl equilibrium — theoretical outcome where public goods are provided at a socially optimal level and costs are fairly apportioned (used in welfare economics).
• Intertemporal equilibrium — equilibrium considered over time, important for consumption and investment smoothing.
• Nash equilibrium — in game theory, a situation where each player’s strategy is optimal given the other players’ strategies (the prisoner’s dilemma is a common example illustrating a Nash equilibrium).

Example

A store manufactures 1,000 toys. At $10 each, none sell; at $8, 250 sell; at $5, 500 sell; at $2, all 1,000 sell. When price equals $2, supply equals demand (1,000 units), so $2 is the equilibrium price and 1,000 is the equilibrium quantity.

Calculating equilibrium price and quantity

To find the equilibrium price:
1. Write the demand function Qd(P) and the supply function Qs(P).
2. Set Qd(P) = Qs(P) and solve for P (the equilibrium price).
3. Substitute that price back into either function to find the equilibrium quantity Q*.

Example with linear functions:
* Qd = a − bP
* Qs = c + dP
Solve a − bP = c + dP → P = (a − c) / (b + d). Then Q = a − bP (or c + dP).

Bottom line

Equilibrium is a central concept that describes where market forces balance. While useful for analysis and prediction, real markets often experience frictions, distortions, and shifting conditions that produce disequilibrium or keep prices from settling exactly at theoretical equilibrium.