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What Is Economic Equilibrium?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2014
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    Conjecture Corporation
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Economic equilibrium is a condition in which various forces are aligned in a manner that creates a balanced state for the economy. While there is some difference of opinion regarding which economic forces must be in harmony for this type of condition to exist, there is often general agreement that supply and demand are more or less equal, and interest rates are at the ideal level to motivate growth. Economic equilibrium may be related to the economy in a specified geographical location, a particular industry, or even a selected collection of markets.

For sellers, the presence of economic equilibrium is often considered an ideal state. This is because there is enough product on hand to meet the needs of buyers, but not so much that huge inventories of finished goods must be warehoused and assessed for taxes. Within this type of economic state, sellers have the benefit of keeping overall operations costs at a minimum, which in turn aids in increasing the amount of net profit that is generated by the business enterprise.

Buyers also benefit from a state of economic equilibrium. Since there are enough goods and services to go around, consumers experience no delays in meeting needs or satisfying wants. One of the byproducts of this type of balance in the marketplace means that prices are likely to be similar among competitors, so consumers can base decisions more on factors such as quality and personal preference, rather than on the actual unit cost of the desired products.

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Even investors may find that economic equilibrium has its benefits. A balance between supply and demand coupled with a balance in interest rates means that it is easier to assess investment opportunities and accurately gauge the rate of return that is possible with each of those investments. Since demand is constant, there are no worries about stock values dropping as consumers lose interest in a given company and its product line. While a state of economic equilibrium does not offer the excitement of a more volatile marketplace, it does provide the chance for investors to allow their holdings to ride for a time and still make money.

Periods of economic equilibrium may be derailed by a number of different factors. Changes in consumer tastes can begin the process. Shifts in political climates in key nations may also create some tension that ends the balanced state. When various events occur that end one period of economic equilibrium, the marketplace makes adjustments and slowly begins to compensate for the new set of circumstances. Over time, the disruption or disequilibrium comes to an end and a new period of economic equilibrium begins, with that period lasting until various factors once again shift in some direction.

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