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.

1 thought on “Market Equilibrium”

  1. Today a reader asked me a question. I replied to her via email, but unfortunately the email bounced back:

    “I just read the essay about the equilibrium in a market. Would you consider ebay as a market where this “ideal state of equilibrium” is achieved? Or are market equilibriums never achieved in real life?”

    My response:

    Hi Christina,

    Thanks much for this great question.

    The market equilibrium I refer to is really never lastingly achieved in real life.

    See, all things that occur on the market are processes. We always act in order to remove one or the other uneasiness in our lives. This is evident in the very fact that we act.

    On ebay you constantly find people who prefer owning cash to owning a pair of shoes and you will find people who prefer owning shoes to owning cash. This is the reason why ebay exists in the first place, right? Ebay woudn’t exist if the market were to reach the theoretical state of market equilibrium.

    What I would say about ebay is that it is a great facilitator of the process of moving toward the theoretical state of market equilibrium more quickly. This targeted state, however, remains in constant flux.

    The closest I can think of where a “market equilibrium” of sorts is reached is two people falling in love. When you fall in love, for a brief moment you feel like things can’t get any better. You are above all things and you wish nothing would change. But, as it is with human nature, we fall out of love after some time and that is when the real process of loving can be actively pursued … :)

    Let me know if you have any more questions!

    Best regards,
    Nima

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