March 18, 2008

Movement towards equilibrium

Filed under: Economics, Vitiated by Ignorance — duncan @ 8:55 pm

Veering back towards the economics I know nothing about – I’m still baffled by equilibrium analysis. Today’s befuddlement: to what extent does any market ever reach equilibrium?

For starters: unless I’m missing something, at competitive market equilibrium, nobody makes any profits. (If any firm was making money, another firm could sell the same product cheaper, and take all the sales.) Since in the real world firms do in fact make profits, this seems to suggest that we don’t have any kind of competitive equilibrium in the real world. Presumably this is for two reasons. First: the market is driven by oligopoly, monopolistic competition, etc – it is not perfectly competitive. Second: the market, constantly disrupted by technological innovations, changes in consumer taste, changes in factor prices, etc. is almost always moving towards some new equilibrium rather than sitting snugly at one.

Which is of course enough to make one have doubts about the emphasis on perfect competition and equilibrium analysis in first year undergraduate textbooks. But that’s not my point today. Today I’m puzzled by my textbook’s account of the movement towards equilibrium. [My textbook: Paul Krugman, Robin Wells and Kathryn Graddy, ‘Economics: European Edition’ (2007)] Here’s one of KWG’s examples:

“In market equilibrium, something remarkable supposedly happens: everyone who wants to sell a good finds a willing buyer, and everyone who wants to buy that good finds a willing seller.” [A misrepresentation of the theory, of course: KWG mean: everyone who wants to buy a good at equilibrium price finds a willing seller; everyone who wants to sell a good at equilibrium price finds a willing buyer. A petty quibble; but this kind of shorthand is used all the time in the economics I’ve been reading, and its effect is to suggest that free markets satisfy all their participants’ needs. In fact, of course, market equilibrium is reached not just by enabling exchanges but also by preventing them: if you want to buy a good, but don’t have enough money to pay equilibrium price, you can’t buy it – and that’s one of the ways in which the market establishes equilibrium price (moving market price along the demand curve until the correct number of people are ‘willing’ to buy the good). It seems at best unhelpful, when describing a competitive market, to write that “everyone who wants to buy that good finds a willing seller.” But all this is obvious and quibbling.]

Carrying on with KWG: “It’s a beautiful theory – but is it realistic?… In London the answer can be seen every day, just before dawn, at the famous Billingsgate fish market… There, every morning, fishermen bring their catch and haggle over prices with restaurateurs, fish and chip shop owners, fishmongers and a variety of middlemen and brokers. The stakes are high. A restaurant owner who can’t provide her customers with the fresh fish they expect stands to lose a lot of business, so it’s important that would-be buyers find willing sellers. For fishermen it’s even more important that they make a sale: unsold fish loses much, if not all, of its value. But the market does reach equilibrium: just about every would-be buyer finds a willing seller, and vice versa. The reason is that every day the price of each type of fish quickly converges to a level that matches the quantity supplied and the quantity demanded.” (p. 73)

I’m kind of tempted to go along to the Billingsgate fish market and see how it actually works. I simply don’t know. It seems likely, from where I’m sitting, with no actual knowledge, that KWG’s description adequately characterises what goes on there. But I’m also inclined, in my completely ignorant state, to doubt that market prices exactly do “quickly converge… to a level that matches the quantity supplied and the quantity demanded.” For instance – doesn’t it seem possible that prices of fish are sometimes reduced as the morning wears on – because, as KWG say, “unsold fish loses much, if not all, of its value”, and certain traders have been unable to get rid of all their stock? Contrariwise – doesn’t it seem possible that if sales are higher than expected, the price is raised as the morning progresses, to take advantage of high demand? These changes in price could be seen as what KWG call the movement towards equilibrium. (Or they could be seen as a form of price discrimination.) I suppose my question is – what benefit do we get from seeing these (of course entirely hypothetical) changes as movements towards an equilibrium? In a scenario in which prices change, should we see this as a market’s movement towards equilibrium, or as a fluctuating equilibrium? Or both? Economics talks about short- and long-term equilibriums; and if we make the short term short enough, we can make every moment in time, in the movement towards equilibrium, its own equilibrium. But this seems to more or less destroy the concept of equilibrium. I suppose I’m saying – why can’t we just analyse the economic forces that, economists tell us, move the market towards equilibrium, without using the concept of equilibrium at all? What does this concept give us, that we can’t get from analysing the market’s barter, power relationships, etc, etc. on their own terms?

Well – it gives us the whole apparatus of equilibrium analysis, of course. So I need to keep plugging away. But in the meantime, has anyone spent much time at Billingsgate fish market?


  1. if you want to buy a good, but don’t have enough money to pay equilibrium price, you can’t buy it

    Which I experience daily. But worse yet and even more frequent, the ‘market’ doesn’t offer what I want. And never will.

    Comment by Chuckie K — March 21, 2008 @ 2:53 am

  2. Good point. But you must want fish now and then. It’s Easter!

    Comment by praxisblog — March 23, 2008 @ 2:48 pm

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