The Equilibrium System

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The Equilibrium System

A reference to equilibrium economics has the same connotation, more or less.

The economic system was seen to resemble the pendulum of an unwound clock.

It could be disturbed by many things, but it would always return to the same position - to the point where the consumer had maximized satisfaction with the best distribution of his or her expenditures and the producer was producing at the most efficient level of output, this being where marginal cost equalled price.

We should also add that everyone or almost everyone would be employed.

For if someone were out of work, he would naturally cut his asking price for a job, give some producer a lower marginal cost and thus make worthwhile his employment.

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The Production Side

Neo-classical marginality held, similarly, that the business firm would extend its production up to the point where the cost of an additional unit of the product would be just equal to the revenue received for that product.

Under competition, of course, that would be the price.

Marginal cost would equal price.

This was the optimal condition of efficiency to which all producers aspired.

So both consumption and production tended to be at the ideal level.

Not quite, however, for the theory always glossed over the fact that the rich balanced their satisfactions at the margin with... see: The Production Side

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