September 20, 2019 

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PARETO EFFICIENCY: A type of efficiency that results if one person can not be made better off without making someone else worse off. Named after Vilfredo Pareto, this criterion is the guiding theoretical notion of efficiency used in the study of economics, especially welfare economics. Pareto efficiency is generally not attained if some resources are idle or unemployed. By engaging idle resources in production, some people can have more production without reducing that available to others. A problem with Pareto efficiency, however, is that it is based on the existing distribution of income and wealth. This is one of two noted efficiency criteria used in economics. The other is Kaldor-Hicks efficiency.

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A state that exists when opposing forces are in balance, with each force exactly offsetting the other, such that there is no inherent tendency for change. Once achieved, an equilibrium persists unless or until it is disrupted by an outside force. The notion of equilibrium is an essential feature in most economic models, such as the market model.
Equilibrium is a balance of opposing forces. In the physical world, the opposing forces might be something like positive and negative electrical charges or the north and south poles of a magnet. In the economic world, common forces include that of market demand and market supply.

A Little Background

Equilibrium is one of the most useful, and widely used, notions in economics. Building on the successful use of equilibrium by physicists of the 18th century to explain gravity, planetary motion, and other phenomena of the physical world, economists of the 19th century adopted this useful notion when they applied the scientific method to study the economic world.

How about a quick example?

Suppose that the twins Donna and Rhonda Newberry encounter one of those doors that swings in and out, like what is commonly found separating the kitchen and the dinning area in restaurants. Donna is on one side trying to come into the kitchen, and Rhonda is on the other side trying to go out. They both push and push, but being twins with equal strength and tenacity, neither can go through.

If each continues to push for hours on end, with neither making progress (like the Three Stooges or the Marx Brothers), then they have encountered the notion of equilibrium. Donna is one opposing force and Rhonda is the other. And until someone or something (perhaps the Keystone Cops) intervenes, then they continue this stalemate, unsuccessfully pushing in opposite ways, in a state of equilibrium.

Political Views

Although extensively used in economics, economists have two minds about equilibrium.
  • Rhonda represents one mind. She contends that equilibrium is THE natural state of the world that perpetually persists unless it is disrupted. Such disruptions are thought to be infrequent and short lived.

  • Donna exhibits the other mind. She feels that equilibrium is more of a goal that the economy pursues. This equilibrium goal is seldom if ever achieved. And if achieved persists temporarily.
The source of this ongoing debate can be traced back at least to the ancient Greek philosophers. The common argument is whether the universe is best characterized by a state of "being" or a state of "flux." This debate has yet to be settled.

More relevant to the study of economics, these two views also underlie alternative economic policies that tend to be affiliated with different political views.

  • If the world tends to be IN equilibrium, then there is little or no need for government intervention, which is consistent with a conservative political view of limited government.

  • Alternatively, if the world tends to PURSUE equilibrium, then there is a definite role for government intervention to help it along the way, which is consistent with a liberal political view of a paternalistic government.

Alternative Theories

Whichever view is preferred, equilibrium is a handy concept underlying all sorts of economic analysis, including the study of the market, the aggregate market, Keynesian economics, consumer demand theory, and short-run production. Perhaps the best known use is the market. In a market, equilibrium is reached at a price in which the quantity supplied is exactly the same as the quantity demanded.

  • Macroeconomic Flux: The study of macroeconomics tends to lean more toward the "flux" view of equilibrium. Two key equilibrium states that are pursued are found in the aggregate market and Keynesian economics. Equilibrium is reached in the aggregate market at a price level in which aggregate demand is equal to aggregate supply. Equilibrium is reached in the study of Keynesian economics at a production level in which aggregate expenditures are equal to aggregate production.

  • Microeconomic Being: Microeconomic analysis tends to be more comfortable with the "being" view of equilibrium. In addition to the standard market model, two other cornerstone analyses--consumer demand theory and short-run production--rely heavily on this notion. In the theory of consumer demand, equilibrium is reached by when consumers select a combination of two or more goods that equate the marginal utility-price ratios. In the analysis of the short-run production by a firm, equilibrium is reached at a production level in which marginal cost is equal to marginal revenue.

Stable and Unstable

By its very nature, an equilibrium does not change once achieved unless it is disrupted by an outside force. However, the manner in which equilibrium reacts to an external disruption makes it either stable or unstable. A stable equilibrium is one that moves BACK to equilibrium, if disrupted. An unstable equilibrium is one that moves AWAY from equilibrium, if disrupted.

An example of a stable equilibrium is a ball resting peacefully at the bottom of a bowl. If the ball is nudged up the side of the bowl, it falls back, and it eventually returns to rest at the bottom of the bowl. An unstable equilibrium, in contrast, is like a ball perched tenuously atop an upside-down bowl. If the ball is nudged, it roles down the side of the bowl, onto the table, off the table, onto the floor, out the door, down the street, into traffic, and then causes a 27-car traffic pile-up that kills 7 people. In other words, it does not return to equilibrium.

Fortunately, an economic equilibrium tends to be of the stable kind. If or when an equilibrium is disrupted, the economic world tends to adapt, adjust, compensate, and work its way back. However, this does not preclude the possibility of some instability. Some economists suggest that business-cycle recessions, economic depressions, and stock market crashes are due in part to an unstable equilibrium.


Recommended Citation:

EQUILIBRIUM, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2019. [Accessed: September 20, 2019].

Check Out These Related Terms...

     | market equilibrium | stable equilibrium | unstable equilibrium | market disequilibrium | shortage | surplus | self correction, market |

Or For A Little Background...

     | model | economic analysis | graphical analysis | scientific method | cause and effect | ceteris paribus |

And For Further Study...

     | comparative statics | market demand | market supply | political views | exchange | short-run production analysis | consumer equilibrium |

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