MARKET EQVILIBRIUM
DEFINITION:
Market equilibrium occurs where supply = demand. When the market is in
equilibrium, there is no tendency for prices to change. We say the market
clearing price has been achieved. A market occurs where buyers and sellers
meet to exchange money for goods. The price mechanism refers to how supply
and demand interact to set the market price and amount of goods sold
EXAMPLE:
Consider the following supply and demand schedules of a hypotetical product
market:
Unit Quantity Quantity
Price Supplied Demanded
8.0 393 44
7.0 368 67
6.0 339 93
5.0 305 124
4.0 262 162
3.0 210 210
2.0 133 280
1.0 0 400
When we plot the above schedules in a single Catesian coordinate system and
fit trend lines to the scattered points, we obtain intersecting supply and demand
curves shown below:
, The equilibrium point of the market is the point at which the supply curves
cross each other. We have equilibrium price and quantity of $3.0 and 210 units
respectively.
At any price above $3.0, the quantity supplied exceeds the quantity demanded.
This results in unsold inventories and forces producers to offer reduced price.
The reduction in price is accompanied by reduction in quantity supplied on the
producers' side and increase in quantity demanded on consumers' side. In other
words, both producers and consumers move down towards the equilibrium point
along supply and demand curves respectively.
At any price below $3.0, the quantity supplied falls short of quantity demanded.
This causes shortage and consumers' start to bid higher prices. The increase in
price motivates the producers to supply more quantity but also causes the
consumers to reduce the quantity demanded. Thus both producers and
consumers move upwards along their respective curves towards the equilibrium
point.
WHY IS THE EQUILIBRIUM BETWEEN SUPPLY AND DEMAND
SPECIFICALLY AT PRICE P*AND QUANTITY Q*?
At a higher price, there would be more quantity supplied than demanded so the
seller would have to lower his price to sell his goods. If the sellers raise their
price too high, where the demand is less than what they have to offer, then they
will have a surplus that will force them to lower their price until they can sell
their entire supply
At a lower price, there would be more quantity demanded than supplied so the
buyer would have to spend more to buy goods. If the sellers set their price too
low, then they will sell their entire supply before they can satisfy the demands
of the market. This would result in a shortage in the market.
DEFINITION:
Market equilibrium occurs where supply = demand. When the market is in
equilibrium, there is no tendency for prices to change. We say the market
clearing price has been achieved. A market occurs where buyers and sellers
meet to exchange money for goods. The price mechanism refers to how supply
and demand interact to set the market price and amount of goods sold
EXAMPLE:
Consider the following supply and demand schedules of a hypotetical product
market:
Unit Quantity Quantity
Price Supplied Demanded
8.0 393 44
7.0 368 67
6.0 339 93
5.0 305 124
4.0 262 162
3.0 210 210
2.0 133 280
1.0 0 400
When we plot the above schedules in a single Catesian coordinate system and
fit trend lines to the scattered points, we obtain intersecting supply and demand
curves shown below:
, The equilibrium point of the market is the point at which the supply curves
cross each other. We have equilibrium price and quantity of $3.0 and 210 units
respectively.
At any price above $3.0, the quantity supplied exceeds the quantity demanded.
This results in unsold inventories and forces producers to offer reduced price.
The reduction in price is accompanied by reduction in quantity supplied on the
producers' side and increase in quantity demanded on consumers' side. In other
words, both producers and consumers move down towards the equilibrium point
along supply and demand curves respectively.
At any price below $3.0, the quantity supplied falls short of quantity demanded.
This causes shortage and consumers' start to bid higher prices. The increase in
price motivates the producers to supply more quantity but also causes the
consumers to reduce the quantity demanded. Thus both producers and
consumers move upwards along their respective curves towards the equilibrium
point.
WHY IS THE EQUILIBRIUM BETWEEN SUPPLY AND DEMAND
SPECIFICALLY AT PRICE P*AND QUANTITY Q*?
At a higher price, there would be more quantity supplied than demanded so the
seller would have to lower his price to sell his goods. If the sellers raise their
price too high, where the demand is less than what they have to offer, then they
will have a surplus that will force them to lower their price until they can sell
their entire supply
At a lower price, there would be more quantity demanded than supplied so the
buyer would have to spend more to buy goods. If the sellers set their price too
low, then they will sell their entire supply before they can satisfy the demands
of the market. This would result in a shortage in the market.
