Market Equilibrium

Market equilibrium is a state of affairs where every consumer on the market is fully satisfied. No exchange or credit transaction could match his value preference and time preference, respectively. All factors of production are utilized in optimal lines of production and no entrepreneur would be impelled to withdraw them for other uses. No changes in value and time preferences occur.

When the entrepreneur identifies factors of production on the market that can be utilized in lines of production where they fulfill more plenty or more urgent demands, he will bid up the price for this particular type of factor. When another entrepreneur wants to withdraw similar factors for the same purpose he will have to pay a higher price. On the other hand, the prices for the goods turned out by utilizing these factors will drop. As a tendency, the gap between the price for factors of production and consumer goods turned out is narrowed down. When there are no more factors of production in any sector that could be utilized any better, the opportunity to realize an entrepreneurial profit disappears. Entrepreneurial profit and the entrepreneurial function disappear altogether. Market equilibrium has been reached.

The state of market equilibrium is an entirely imaginary state. It would reflect complete satisfaction and happiness on the part of every individual on the market. It would render any further entrepreneurial action superfluous, as action is prompted by the desire to change one’s current situation. In reality, individual value preferences constantly change. New, more efficient utilization for factors of production is constantly being discovered. Entrepreneurial innovation constantly identifies new future demands.

However, the market equilibrium is an important construct to understand the changes that occur on the market. As expained above, the process of price formation, and the actions prompted by it have a tendency to move the market closer and closer toward the state of market equilibrium. As value preferences change and discovery of more efficient ways of production occurs, so does the potential state of market equilibrium. Actors on the market perform actions that again move the market data closer to this equilibrium which, however, remains in constant flux.

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