What is Equilibrium?

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The term “Equilibrium” means a state of balance. In economics equilibrium means absence of tendency to more from a particular point.

Stable equilibrium

State equilibrium is that type of equilibrium where any disturbance in the equilibrium situation is self adjusting so the old equilibrium position is restored. In other words of Marshall ‘When the demand price is equal the supply price, the amount produce has so tendency either to be increased or decreased, it is an equilibrium. The stable equilibrium can be explain with the help of following diagram.

In the above diagram we have shown stable equilibrium positions. Original equilibrium point is E where demand and supply are equal at OP price level.

If price is increased to OP1 then supply will be more than demand (P1Q>P1R). As a result the price level will rise to OP again.

Further, when price falls to OP2 then demand will be more than supply (P2Q1>P2R1). As a result the price level will rise to OP again.

Thus if we disturb the demand supply interaction model through price raising and price reducing then the system will be restore itself in the equilibrium position where D = S. This is called stable equilibrium.

Unstable equilibrium

Equilibrium is unstable when any disturbance in equilibrium situation brings in forces which more the system away from it, never to be restored. This unstable situation can be explain by the positive demand curve and negative supply curve.

In the above figure DD is the demand curve for Griffin goods and SS is the supply curve under increasing cost condition. Both the curve intersects each other at point E where demand is equal supply at OM level of quantity.

Suppose, price increase to OP1. Here demand is more than supply (P1Q>P1R). As a result the price level will increase further and it will never restore at point E.

Similarly, at point OP2, the supply is more than demand (P2Q2>P2Q2). As a result the price level will decrease further and it will never restore at point E.

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Conclusion

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What is Equilibrium? | Stable and Unstable equilibrium in economics