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Political Econ

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  • September 11, 2013
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Outline the limitations of equilibrium analysis in economics. Explain the significance of ‘historical time’ and the ‘traverse’ in your discussion

Equilibrium can be defined as a condition or state in which economic forces are balanced. These economic variables will be unchanged from their equilibrium values in the absence of external influences.

The concept of equilibrium is fundamental and an old concept. It has however come under much squinty due to its very basic assumptions and ignorance of various factors such as the impact of historic events on the present and future events.

The neo classical economist, who believed in the combined assumptions of maximising behaviour, market equilibrium, and stable preferences, saw equilibrium a ‘balance’ reached between opposing forces such as the forces of demand and supply. They further believed that equilibrium denotes outcomes that, if achieved, would be characterised by the absence of any tendency for change in the absence of exogenous disturbing influences.

There is no doubt that the concept of equilibrium is a key notion in understanding basic economic models and how policy makers can overcome situations of economics hardships such an unemployment recession and high rate of inflation. There are however some limitations associated with the way the concept works in real life and some the key factors that is does not take into consideration.

One of the key set backs when thinking of equilibrium is that we assume that either the economy is in the state of equilibrium or it tends to move towards equilibrium The concept of equilibrium does not provide any means to show how the economy reached the sate of equilibrium or what factors are currently driving it to equilibrium

The fact that neo classical economist- pioneers of equilibrium use comparative statics, which is the comparison of two different economic outcomes, before and after a change in some underlying exogenous parameter for determining a...