Equilibrium

In economics, an equilibrium is a situation in which no agent has an incentive to change any of her choices, given the constraints she faces (constraints being interpreted in a broad sense here):

  • her perceptions of the behavior of other agents;
  • the terms of trade (prices);
  • the strategic environment;
  • her individual characteristics such as perferences (or production technologies), wealth, and computing capabilities.

    In addition to this central property, it is also required that every agent makes optimal choices based on correct expectations of these constraints. Important applications of the concept of an (economic) equilibrium are the formation of prices on markets (the competitve market equilibrium), and the strategic equilibria used in game theory.

    See also: competitive market equilibrium, strategic equilibrium

    Literature: Reiter (1987), Varian (1987)

    Entry by: Joachim Winter

    June 17, 1999
    Direct questions and comments to: Glossary master