What Is The Concept Of Equilibrium In Economics?

The concept of equilibrium has been borrowed from mechanics where we get the idea of equilibrium system of forces. In mechanics, a system of forces is said to be in equilibrium if the forces making for movement in one direction are exactly counterbalanced by the forces making for movement in the opposite direction. Thus, an equilibrium situation is a state of rest characterised by the absence of change over time. The equilibrium value of a variable is simply that value which, if reached, will persist.

Since economic is a social science which is concerned with human behaviour, let us consider what equilibrium means in terms of human behaviour. For this let us take the concept of equilibrium price. In microeconomic theory we know that any price is said to be an equilibrium price if the quantity demanded by all buyers at this price is equal to the quantity supplied by all sellers at this price. If the equilibrium price prevails, the purchase plans of the buyers are satisfied and the sales plans of the sellers are also satisfied.

In the same way, the output level for the economy as a whole is in equilibrium when the planned demand for output is equal to planned supply of output. Total value of planned output is known as an aggregate supply and the total value of planned demand is known as an aggregate demand. Hence the output level for the economy as a whole will be in equilibrium when aggregate demand equals aggregate supply.