Equilibrium

Equilibrium is a concept used to explain prices fluctuations. The changing needs and wants of the individuals will cause price movements in goods. These prices tend toward an equilibrium, or final price, where the quantity demanded is equal to the quantity supplied. Equilibrium, although useful to describe price movements, never occurs except temporarily and imperfectly (for example in the 'close' of the stock market). Market prices, by some economists, are said to be in equilibrium rather than moving toward equilibrium. For example, the mathematical school and the efficient market hypothesis base their theories on a constant equilibrium.

Equilibrium, as a mental tool, explains the fluctuations of market prices. Prices are moved by the "invisible hand" toward the final or equilibrium price. However, in reality, the future equilibrium and final price are also always moving. "The final price," says Mises, "can only be defined by defining the conditions required for its emergence. No definite numerical value in monetary terms or in quantities of other goods can be attributed to it." Present conditions may suggest how prices will move, but never the magnitude.

Links

• Human Action complete text (pdf)