Markets and Equilibrium and Understanding Macroeconomics

Markets and Equilibrium:


Economists frequently speak as if all economic activity occurred in the great open air market of medieval merchant cities. Contracts between workers and supervisors are made in the ‘labour market.’ All the borrowing of money from and the depositing of money in banks happen in the ‘money market.’ Supply and demand equilibrium happens in the “goods market.” In fact, in the market squares of preindustrial trading cities you might survey the purchasers and sellers, and form a nice idea of what was being sold for how much.

In using the open air marketplaces of centuries past as a symbol for the complex procedures of matching and exchange that happen in today's current industrial economy, economists are supposing that information travels fast sufficient and purchasers and sellers are well informed as much as necessary that prevailing costs and quantities are as if we in fact could travel around the perimeter of the market and observe all purchasers and sellers in an hour. In most cases this would be a good intellectual bet to make, but sometimes (e.g. in situations of known as structural unemployment) it may not be.


Economists use most of their time looking for the state of equilibrium, ‘a point or points of balance at which a number of economic quantity is neither rising nor falling.’ The dominant metaphor is of an old fashioned scale whose two pans are in balance. This search for balance is an effort to simplify the problem. Economics questions are much easier to analyze if we can recognize “points of rest” where pressures for economic quantities to increase and decrease are evenly balanced. Once the potential points of rest have been recognized, economists may understand how rapid economic forces would push economy to those points of balance. This hunt for points of balance, followed by an study of the speed of adjustment to balance, is the most general way of taking place in any economic analysis.

Do not, however, forget that this prototype of thought is just an aid to figuring out economic theories and standards. They aren’t theories and standards themselves. The theories and standards, in turn, are just aids to realizing the reality; they aren’t themselves the reality.

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