Overview
An equilibrium is a point where a system comes to rest. That is, all internal forces are balanced and the system stops moving. When a change to the system occurs, an imbalance in the internal forces may arise, causing the system to move from its current state to a new state where the forces are in balance again.
Topics
The following chart demonstrates the movement between two equilibrium points. Initially, the markets/economy is in equilibrium at equilibrium point 1. Then the economy changes, creating a new equilibrium point at equilibrium point 2.
Equilibrium arguments suggest that the economy moves smoothly from equilibrium 1 to equilibrium 2, where it comes to rest.
Note, equilibrium arguments typically assume that the economy moves in a somewhat straight line trajectory from one equilibrium point to the next. To the extent that the economy is a non-linear system, and subject to turbulent transitions or chaos, equilibrium arguments will not be an effective predictor of market dynamics.