Definition of Equilibrium in Economics

Equilibrium

The concept of an economic equilibrium is fundamentally very complex and subtle. The goal to is to derive the outcome when the agents described in a model complete their process of maximizing behavior. Determining when that process is complete, in the short run and in the long run, is an elusive goal as successive generations of economists rethink the strategies that agents might pursue.

At its simplest, however, we often find an equilibrium at the intersection of two or more lines. The explanation is this. Suppose line A represents the optimizing behavior of one group of agents, and suppose line B represents the optimizing behavior of another group of agents. Then, the intersection of lines A and B is the equilibrium where both groups of agents are optimizing.

The classic example is supply and demand. The supply curve shows the quantity supplied at a given price by profit-maximizing firms. The demand curve shows the quantity demanded at a given price by utility-maximizing consumers. The intersection of the supply curve and the demand curve is the point that maximizes both profits and utility.

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