Equilibrium refers to a balance in supply and demand, resulting in stability in prices. In classical economics, free markets naturally tend toward a state of equilibrium: lowered supply creates higher prices, which in turn sparks reduced demand. This principle also works in reverse: excessive supply leads to cheaper prices, increasing demand. In the long term, supply and demand remain relatively balanced.
More recently, economists have examined ways in which monopolies and cartels thwart this process by keeping prices artificially high; they can do this due to lack of competition from other businesses. Luxury goods like diamonds can also be artificially limited in supply despite high demand. Economists now define equilibrium by three governing factors: consistency in behavior of agents, lack of incentive for an agent to change behavior, and the existence of a dynamic process at work in the market.
Though equilibrium is generally thought to be desirable, it is not always a sign of a healthy, functioning market. Historically, the Great Irish Famine of 1845 occurred during a time of price equilibrium: the high profits of selling grain and other goods to the British created a stable price much higher than what tenant farmers could afford, leading to dependency on the potato for the poorer sections of society.
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