Types of Equilibrium in Market

Introduction: What is a Market?

A market is a place where buyers and sellers can meet to exchange items. There are physical markets such as those containing retail stores and virtual markets such as online stores. In the case of virtual markets, there is no physical interaction between the buyers and sellers. However, in physical markets, the buyers and sellers have interactions.

Transactions in a marketplace. may include goods, services, currency, or information apart from any other combination of any of these items. Things should pass from one person to another in a market.

There is a need for a minimum of two parties in a market for a trade. However, a third party is required to instill competition and bring a balance in the transactions of a market. A market in perfect competition is characterized by a large number of buyers and sellers.

The term market can encompass a variety of things based on the context. For example, stock markets are places where securities are traded. There may also be special contexts to market such as the housing markets. The term may also indicate a broad and worldwide industry such as the diamond market of the world.

There is a concept called market economy that helps shape the markets. In such a concept, the market is controlled by demand and supply. The market economy is an open market system where the participants are free to choose, buy, and sell any item. Although most market economies have little government intervention, the state of intervention is often very low. Some examples of market economies include the US, the UK, and Japan markets.

Assumptions of a Market

There are six important assumptions that must hold good for a market. These are as follows

• There should be a single type of goods or services in the market.

• The goods and services bought and sold in the market should be identical.

• In a single market, the products sold should have a single price.

• All of the consumers in a market should have the same and enough information about the products.

• Most of the sellers and buyers in a market have good interactions between them.

• The benefits and costs of the transaction are acquired by sellers and buyers of the market.

These assumptions indicate that buyers who value the objects more than their costs will be a customer. Moreover, there is no transaction that will not occur due to a lack of information about the products or services.

These assumptions hold good only for ideal and perfect markets which are impossible to find in the real world. Most of the markets deviate from these assumptions in one way or the other.

What is Market Equilibrium?

Market equilibrium is a condition where the demand and supply of the market balance each other. Usually, when over-supply occurs the prices go down which increases the demand. In the case of over-demand, the prices go up which diminishes the demand.

The price at which supply meets the demand in a market is known as the equilibrium price. The periodic consolidation of an index or its sideways momentum indicates market equilibrium over a certain period of time.

The prices of a product often hover over the equilibrium price level. When the prices go too down, buyers buy products more than usual while in the case of a price rise, the buyers buy less, and hence price comes down.

Types of Equilibrium

General equilibrium

General equilibrium is the one where aggregation of demand and supply forces occurs at the macroeconomic level. It does not consider the microeconomic application of the forces of the individual markets. It is used mostly in Walrasian economics.

Economic equilibrium

Economic equilibrium is mostly related to price equilibrium where market forces bring a balance in the prices of products. It is also used to represent interest rates, unemployment, etc.

Competitive equilibrium

The balance of market forces in competitive equilibrium takes place via competition. Producers that are low-cost sellers get the biggest market share in competitive equilibrium whereas the buyers in the system get the best prices.

Underemployment equilibrium

It has been observed that a persistent level of unemployment occurs when the economy is in general equilibrium. This is termed underemployment equilibrium and is found to be mostly associated with Keynesian economics.

Lindahl Equilibrium

Lindahl equilibrium is a special case where the cost of the optimal amount of public goods produced is shared among everyone. It is used to build tax policies and is ideally described as a theory only. It is also an important concept in welfare economics.

Nash equilibrium

In Nash equilibrium, the optimal strategy involves considering the optimal strategy of the opponent or the other player. It is a part of game theory.

Intertemporal equilibrium

Intertemporal equilibrium considers the changes in supply and demand which bring a fluctuation in supply and demand which is due to the swings of the market forces depending on market requirements. It is used to prepare household budgets for a smooth transition over a longer period of time.

Key Takeaways

• Markets are places where sellers and buyers exchange goods for the price of the product.

• When we talk about market equilibrium we mainly talk about the equilibrium of prices.

• In a market economy, market equilibrium is reached automatically.

• When a producer produces too much and there is an over-supply, the demand for the product will go down.

• In the case of over-demand, the prices of products will go up as products become scarce.

• When the supply of goods matches the demand, the market is said to have reached an equilibrium.

• There are three major characteristics of equilibrium: the agents' behavior is consistent, there is zero incentive for agents to change behavior, and the equilibrium outcomes are a result of a dynamic process.

• There are many types of equilibrium in economics and each one is important in different fields of application.

• Perfect equilibrium is reached only in theory. There is no perfect equilibrium available in any market economy

Conclusion

Market equilibrium is a very important concept in economics and business studies. Companies often check this theory to get an idea about the optimum price for the products in the market. Knowing the market equilibrium not only helps in setting prices but also offers an idea of how much demand is there for certain products in the market. It is therefore of supreme importance to producers and traders.

FAQs

Qns 1. How many minimum parties are required for a market?

Ans. A minimum of two parties are required to form a market.

Qns 2. What does the optimal strategy involve in Nash Equilibrium?

Ans. In Nash equilibrium, the optimal strategy involves considering the optimal strategy of the opponent or the other player. It is a part of game theory.

Qns 3. How do oversupply and overdemand result in equilibrium?

Ans. Usually, when over-supply occurs the prices go down which increases the demand. In the case of over-demand, the prices go up which diminishes the demand. This results in an equilibrium position in the market.