What Is the Role of Equilibrium in Macroeconomics?

Equilibrium in macroeconomics can refer to multiple concepts, from analytic models to the idea of price stability in the marketplace. Although used to name several economic concepts, equilibrium generally refers to the balance of economic variables, relative to the business cycle. Balance, in macroeconomic terms, typically centers on the concepts of supply and demand, the key components of the business cycle. When goods purchased are equal to goods produced, prices stabilize and remain constant until conditions change. This balance is deemed static equilibrium.

Economists use static equilibrium to help determine what factors are likely to influence future economic conditions and marketplace performance. For example, economists determine the ideal stable environment and at what point prices become stable or static. Using current and historical data, economists can deconstruct past market performance, include the factors and conditions needed for price stability, and thus determine likely future economic performance. As such, the role of equilibrium in macroeconomics is to serve as a measuring device to determine the ideal middle ground between variables.

In a single business, a business cycle is the natural changes in prices charged and profit realized over a period of time. Used in macroeconomics, the business cycle tracks the changes of the aggregate supply and aggregate demand of all businesses and markets in a country or region. Should all factors balance, meaning supplies meet demand, available raw materials are plentiful, government regulations freely allow maximum production and sales, and consumers have the income to make purchases, the market is said to be balanced. Prices stabilize in such an environment, creating market equilibrium.

Changes occur in the marketplace for a variety of reasons, including changes in government regulations, weather conditions, political events, and the evolution of technology, among many other variables that affect supply and demand. Whether supply increases or demand increases, the result is a change in prices that can have a ripple effect in other aspects of an economy. Economic models frequently use equilibrium in macroeconomics as a basis for predicting when and to what extent prices will change, as well as the effects of price fluctuations on other economic factors.

Prediction tools or models use the concept of equilibrium in macroeconomics in a myriad of ways, depending on the aggregate information available and the specific economic sectors involved. Fiscal policy development may also use different forms of equilibrium models and theories to determine when a government should intervene to influence prices and economic growth. These theories and models fall under a discipline known as quantitative dynamic general equilibrium. Various aspects of an economy can be analyzed using different dynamic or static equilibrium models, but the primary role of equilibrium in macroeconomics does not change.