<P> In a competitive equilibrium, supply equals demand . Property P1 is satisfied, because at the equilibrium price the amount supplied is equal to the amount demanded . Property P2 is also satisfied . Demand is chosen to maximize utility given the market price: no one on the demand side has any incentive to demand more or less at the prevailing price . Likewise supply is determined by firms maximizing their profits at the market price: no firm will want to supply any more or less at the equilibrium price . Hence, agents on neither the demand side nor the supply side will have any incentive to alter their actions . </P> <P> To see whether Property P3 is satisfied, consider what happens when the price is above the equilibrium . In this case there is an excess supply, with the quantity supplied exceeding that demanded . This will tend to put downward pressure on the price to make it return to equilibrium . Likewise where the price is below the equilibrium point there is a shortage in supply leading to an increase in prices back to equilibrium . Not all equilibria are "stable" in the sense of Equilibrium property P3 . It is possible to have competitive equilibria that are unstable . However, if an equilibrium is unstable, it raises the question of how you might get there . Even if it satisfies properties P1 and P2, the absence of P3 means that the market can only be in the unstable equilibrium if it starts off there . </P> <P> In most simple microeconomic stories of supply and demand a static equilibrium is observed in a market; however, economic equilibrium can be also dynamic . Equilibrium may also be economy - wide or general, as opposed to the partial equilibrium of a single market . Equilibrium can change if there is a change in demand or supply conditions . For example, an increase in supply will disrupt the equilibrium, leading to lower prices . Eventually, a new equilibrium will be attained in most markets . Then, there will be no change in price or the amount of output bought and sold--until there is an exogenous shift in supply or demand (such as changes in technology or tastes). That is, there are no endogenous forces leading to the price or the quantity . </P> <P> The Nash equilibrium is widely used in economics as the main alternative to competitive equilibrium . It is used whenever there is a strategic element to the behavior of agents and the "price taking" assumption of competitive equilibrium is inappropriate . The first use of the Nash equilibrium was in the Cournot duopoly as developed by Antoine Augustin Cournot in his 1838 book . Both firms produce a homogenous product: given the total amount supplied by the two firms, the (single) industry price is determined using the demand curve . This determines the revenues of each firm (the industry price times the quantity supplied by the firm). The profit of each firm is then this revenue minus the cost of producing the output . Clearly, there is a strategic interdependence between the two firms . If one firm varies its output, this will in turn affect the market price and so the revenue and profits of the other firm . We can define the payoff function which gives the profit of each firm as a function of the two outputs chosen by the firms . Cournot assumed that each firm chooses its own output to maximize its profits given the output of the other firm . The Nash equilibrium occurs when both firms are producing the outputs which maximize their own profit given the output of the other firm . </P>

When would a system not return to the original equilibrium but establish a new one