Question

What do you undersatnd by the term equilibrium? Explain and distinguish between (a) Stable and unstable equilibrium (b) Partial and general equilibrium, with the help of suitable diagrams and examples.

Answer 1

Equilibrium is a state of no change. In economics, it represents the price and output where both buyers and sellers are at satisfied and nobody wants to change their position in the market. Unstable equilibrium occurs when either demand or supply is greater than the other which causes surplus or deficit in the economy. Otherwise, an equilibrium is always stable.

Partial equilibrium is an equilibrium related to a specific market for example labor market would be at equilibrium where marginal revenue product equals equilibrium wages. Whereas general equilibrium refers to the equilibrium of the entire market inclusive of input markets as well. It shows how one market is dependent on other markets to perform and how they interact with each other.