Page 19 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 2.1 Meaning

Equilibrium is derived from the Latin word ‘aequilibrium’ which means equal weight. In economics
its application has been taken from Physics. In Physics, it means equal. This is the state of weight
where opposite power or tendencies deactivate each other. Prof. Stigler states the theory in these
words, “Equilibrium is the state where motion doesn’t act. We say it because this state does not fix
automatically but differentiate the power.” Equilibrium means the state of rest, which shows the
lack of change. In the words of Prof. J. K. Mehta, “In Economics, equilibrium states the absence of
changes in motion.” This is the state where all participants in market agree on each other’s opinion
and nobody needs to change or exchange his opinion. In other words, this is the market condition
where all its participants have full faith on each other. In the words of Sketovosky, “A market
or an economy, or power and the group of firms feel secure when nobody wants to change his
behaviour. So to balance a group it is necessary to balance all individuals on its group and they
balance each other”. Let’s assume that everyday a requisite amount of fish comes in a market and
fulfill buyer demand. To do this constantly, it is necessary to fix the price of fish. This equilibrium
state remains until the demand and buy are equal. The amount on which fish sells and buys is called
Equilibrium price and the quantity of fish that sells and buys on that price is called Equilibrium
quantity. Neither seller nor buyer feels to change this equilibrium price. For example, in Fig. 2.1,
supply line ‘S’ and demand line ‘D’ cut each other at point E, which elaborates the point of balance
and OP and OQ, demonstrate the equilibrium price.

Fig. 2.1

S
d
P 1
1 s 1
Price P E
P s d
2
D

O Q Q Q
1 2
Quantity

If the price falls anyhow and comes to below its equilibrium price OP then the demand will increase
2
and supply will decrease means P d > P power will be effective and drive the price to its equilibrium
S
2
2
state E. Thus, supply will increase by increasing price from equilibrium level to OP level and demand
1
would decrease means P S > P d and price will come again on E.
1 1 1 1
Self Assessment
Fill in the blanks:
1. Equilibrium is the state in which motion does not have ............................ .
2. After a period when equilibrium state demolished then it is called ............................ .
3. A full load of boat remains ............................ .

12 LOVELY PROFESSIONAL UNIVERSITY