In economic analysis, equilibrium is classified as below.
1. Stable, Unstable and Neutral Equilibrium:
Prof. A.C. Pigou has defined these three kinds of equilibria in the following words: “A system is in stable equilibrium position if, when any small disturbance takes place, forces come into play to reestablish initial position; it is in neutral equilibrium if, when such a disturbance takes place, no re-establishing forces but also further disturbing forces are evoked so that the system remains at rest in the position to which it has moved; and, it is in unstable equilibrium if a small disturbance calls out further disturbing forces which act in a cumulative manner to drive the system from its initial position.” The three types of equilibria are explained in Figures 3.2 and 3.3.
In the right panel, distorted price OP’ causes supply, ab, which is just equal to the excess demand, dc. In consequence, fall in price caused by the excess supply is also equal to the rise in it caused by excess demand. Price fluctuates between OP’. It never comes anywhere near the equilibrium level.
2. Short Run and Long Run Equilibrium:
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Time for adjustment being short in the short run, the supply curve is less elastic in short run than in long run. Accordingly, equilibrium price and quantity differ in the two cases as shown in Figure 3.4. Market demand remains fairly stable whether in short run or in long run.
3. Unique and Multiple Equilibrium:
Equilibrium may be unique or non-unique depending on whether the demand and the supply curves intersect each other at one point or at more than one point. If they intersect at one point, the equilibrium is a unique one (Figure 3.5a), but if they intersect at more than one point, it is non-unique or multiple equilibrium (Figure 3.5b).
4. Partial and General Equilibrium:
Partial equilibrium refers to the equilibrium of only a part of a system. For example, equilibrium of a single product while prices of all the other products remain unchanged during the period of such analysis. English Economist Marshall popularised partial equilibrium analysis.
The role of ceteris paribus (other things remaining same) is crucial for partial equilibrium analysis. Market equilibrium of a product in respect of its price through demand and supply forces provides another example of partial equilibrium.
General equilibrium, on the other hand, refers to the equilibrium of entire economy. It involves interdependence of all the market segments. For example, equilibrium of the product market along with that of the factor market and the money market is general equilibrium.
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The French Economist Leon Walras was the first one to study general equilibrium systematically. The analysis is highly mathematical and complex because it involves several variables.
5. Static and Dynamic Equilibrium:
According to Prof. Mehta, “Static equilibrium is that equilibrium which maintains itself outside the period of time under consideration.” It is related to the equilibrium of a static economy in which there is no change in prices, outputs, incomes, technology, tastes and consumers’ preferences.
It is based on the assumption that a state of bliss (equilibrium) once reached is always relished by individuals, firms, industries, etc., so much so that they turn reluctant to leave it. A ball rolling at a constant speed, a forest with fixed composition with decaying trees being replaced by new ones, and an industry with all the firms in it earning normal profits, are a few examples of static equilibrium, Prof. Boulding himself gave the first two.
Dynamic equilibrium refers to the equilibrium in which nothing remains unchanged; whether it is price, output, incomes, or tastes or technology. Participating individuals, firms and industries face persistent threat to their equilibrium position from those in disequilibrium.
The position of equilibrium, thus, keeps changing at regular intervals. According to Prof. J.K. Mehta, “when after a fixed period, the equilibrium state is disturbed, it is called dynamic equilibrium.”
The Cobweb Theorem provides the simplest form of a dynamic model of equilibrium in which supply of a product in the current period depends on its price in the previous period. Symbolically
QST = f (PT – 1)
Here, QST = quantity supplied in period T
PT – 1 = price of the product in the period T – 1
The best example of Cobweb model is provided by the supply of agricultural products. Price of corn in the previous year guides the current production of corn. If price of wheat was high last year, the cultivators focus on production of wheat in the current year leading to much higher supply of wheat than what is justified in the current year.
The excess supply of wheat in the current year fetches lower price for it in the market. This prompts the cultivators to curtail production of wheat in the coming season with the result that the supply of wheat suffers next season.
As is obvious, price of wheat in the coming season would shoot up. Such supply lags often characterise industries where production is periodic (non-continuous), requiring a certain fixed time period for the production process to complete itself, and also where same output decisions are taken by all the producers independently. Producers never learn from their repetitive experiences of the past frustrations and continue to be nose-led by the previous year’s price.
The Cobweb Theorem was developed by Henry Schultz, Jan Tinbergen and Arthur Hanai in 1930, but the name ‘Cobweb Theorem’ was first suggested by Nicholas Kalder in 1934. The theorem is based on the time lag concept, as explained above.
The term ‘cobweb’ is used to reflect the price-quantity variations that resemble a spider’s web. The one shown in Figure 3.6 is a ‘convergent cobweb’. It follows the pattern of ‘stable equilibrium’ of Figure 3.2 (left panel).
Also, a cobweb may follow the pattern of unstable equilibrium (a divergent cobweb) as shown in Figure 3.3 or it may follow the pattern of neutral equilibrium (a neutral cobweb) as shown in Figure 3.2 (right panel). What determine the pattern of a ‘cobweb’ are the relative price elasticities of demand and supply curves.
Likewise, what distinguishes Cobweb theorem from other forms of stable, unstable and neutral equilibria depicted in Figures 3.2 and 3.3 is mainly the fact that Cobweb theorem concerns in particular with lagged variations of demand and supply while the other forms of equilibria may relate to any variations—lagged or non-lagged. The reader may try a divergent cobweb following the pattern of Figure 3.3 as also a neutral cobweb, following that of Figure 3.2 (right panel).
