EQUILIBRIUM, DISEQUILIBRIUM, STATIC AND ANALYSIS

EQUILIBRIUM, DISEQUILIBRIUM, STATIC AND DYNAMICS CONDITIONS

BY: EDE KENECHUKWU KENNETH edekenechukwuk@gmail.com

Equilibrium is a state of balance; it is achieved at a point where two or more variables are equal. This is not to say that nothing changes but then rather than the actions are repetitive in nature. In the microeconomics model of demand and supply for instance, Q_dt is the planned quantity demanded per period of time while Q_st is the planned quantity supplied per period of time.

                             Q_dt     =       α       -         α₁P………………1

                             Q_st     =       α       +       α₁P………………2

The model is in equilibrium if

                             Q_dt     =       Q_st

This can be graphically illustrated as:

 From the above fig. quantity demanded and quantity supplied are at equilibrium at point E with price P₀. A shift in the supply curve from Q_SO to Q_S1 shifts the equilibrium from E to E₁. At point E₁ there are disequilibrium since we have excess supply.

STATIC AND DYNAMICS

In the static analysis only positions of equilibrium are considered while in the dynamic analysis the movement between one equilibrium position and another is explained. In constructing economic model, we incorporate time by splitting up into period and evaluating how what happened in one period affects the preceding periods and what expected to happen in the proceeding periods.

Specifically, the variables in the dynamic models are dated while variables in the static models are referred to the same period. The static analysis does not explain the process of change in a model because it ignores the passage of time. It can indicate the position of the model in a period but cannot reveal what the position will be in any other time. If the model is not changing but simply repeating the same result period after period, static analysis can reveal both where the system is in the present period and where is will be in the future period. We refer to this case as the stationary-state equilibrium because the equilibrium does not change from one period to another.

Dynamic analysis can only be applied to a model in which a single, non-shifting equilibrium position is established by the relationship among the variables. When static analysis is applied in a period of disequilibria, it can only show that for that particular period the values of the variables will be changing from that period to the next. Static analysis can explain why this is in disequilibrium, what is the relationship among the variables is useful for equilibrium and in what direction the system will move next. It cannot explain the actual process of adjusting from one equilibrium position to the next. It is only the dynamic analysis that can trace the adjustment path through time.

We can use demand and supply to illustrate static analysis. If the price and quantity combination in any period is not in equilibrium, price and quantity must change since equilibrium is assumed and demand and supply do not shift, the changes over time lead the model to this equilibrium position. There is no sufficient information to state what time path, price and quantity follow in adjusting to this new equilibrium, and it requires dynamic analysis. We use the method of dynamic comparative statics to compare the new equilibrium position with the initial equilibrium position.

Dynamic analysis needs some forms of adjustment mechanism to be specified. In the micro economics model of demand and supply, an excess supply brings a fall in price. Therefore, the rate of change in price is proportional to the excess demand or supply in the market.

                         ▲P        =       ¢(Q_d  - Q_s)………………………………1

Where: ▲P      =           change in price

                         Q_d          =       Quantity demanded

                         Q_s          =       Quantity supplied

                         Q_d          -         Q_s      =       Excess demand

                         ¢           =       the speed of adjustment.

If ¢ = 0 there will be no change in the price of the good. If the ¢ = α, the speed of adjustment will be high to the extent that there will be no disequilibrium. If ¢ ≤ 0≤ α, the speed of adjustment is finite. If both demand and supply are linear function of the price level then

Q_d                     =           α₀      -         α₁P………………………..2

Q_s                     =           β₀      -         β₁…………………………..3

Substituting for Q_d and Q_s in the equation (1) we have:

▲P                   =                     ¢(α0  -  β0) - ¢(α1         +       β1)……………4