Static vs Dynamic Equilibrium

Equilibrium is a poorly understood term on the internet, especially when applied to economics. Consider these examples:

  1.  Imagine an object lying on a table in a room. The external forces on the book (gravitational force) are equal to the normal force provided by the table. Assuming we’ve left the system unchanged, the properties of the system (microscopic and macroscopic) will remained unchanged as time goes on. This is called a static equilibrium.
  2. Now imagine a reversible chemical reaction. When this system reaches equilibrium, reactants are converted into products and products are converted into reactants at a constant rate. So while there is no net change in the system, chemical reactions are constantly taking place. The properties in the system are still moving/changing as time goes on. This is called a dynamic equilibrium.

equib-for-rev-reaction

In economics, equilibrium can be applied in a similar fashion as in the natural sciences. For example:

  1. Static equilibrium for a specific model is where there is a lack of tendency to change. In a basic supply and demand model, equilibrium is where quantity demanded and quantity supplied are equal. No agent in the system has an incentive to change it’s behavior. The endogenous variables in the system will remain at those values until the system is perturbed.
  2. Dynamic equilibrium in economics is a little bit trickier to define. First let’s look at what we mean by the word “dynamics” in economics. There are several definitions of economic dynamics (1), but they all seem to have one thing in common, the concept of time. Economic dynamics basically gives a continuous picture of the economy over a period of time. A dynamic equilibrium is when the endogenous variables change at the same rate over time. Consider a model of inflation. Over time, the price level, nominal money supply, and other nominal values increase at the same rate. However, the real price level has remained unchanged.

Now these are just two simple examples of how equilibrium is used in economics. Depending on the model, the word “equilibrium” might mean something else.

When people criticize economists for assuming equilibrium in their models, they are typically only talking about static equilibrium.  But this is a very, very narrow definition of the word “equilibrium” that ignores decades of economic research. So while the criticism occasionally hits the mark (sometimes the assumption of equilibrium is just wrong), it usually reveals an ignorance of a very deep and complicated field.

Footnotes:
1. Some examples:

“Economic Dynamics those parts where every quantity must be dated.” – Hicks

“Economic dynamic is the study of economic phenomenon in preceding and succeeding events.” – Bamoul

Links:

  1. Colds, strokes and Brad Delong
  2. Dynamic Equilibrium
  3. Chemical Equilibrium: A Dynamic Concept
  4. What is an economic equilibrium?
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