Market Equilibrium The Concept

Market Equilibrium the concept We must first understand how the price mechanism determines equilibrium in the market. Through the interplay of the forces of supply and demand the prices of commodities in the market are determined. Market Equilibrium is when at a certain price level supply equals demand. Market Equilibrium occurs at the intersection of the supply and demand curve. At this point there is no tendency to change and the market is happy  Excess Demand (below market equilibrium) 1. demand for goods exceeds supply 2. competition among buyers for limited goods 3. firms push up prices 4. expansion in supply as it is more profitable for firms to produce 5. contraction in demand because of increasing prices 6. movement towards market equilibrium where the market clears Excess Supply (above market equilibrium) 1. supply of goods exceeds demand 2. lack of demand cause decrease in the price of goods 3. expansion in demand due to falling prices 4. contraction in supply as it is less profitable for firms to produce 5. movement towards market equilibrium where the market clears Changes to market equilibrium Changes to price and quantity can be changed by any circumstances that lead to a shift in either or both the demand and supply curve.

DEMAND Increase in Demand 1. more of the product demanded at the old equilibrium price 2. demand exceeds quantity supplied 3. competition forces prices to increase 4. expansion in supply as it is more profitable for firms to produce 5. contraction in demand due to increasing prices 6. movement towards market equilibrium where the market clears Decrease in Demand 1. less of the product demanded at the old equilibrium price 2. supply exceeds quantity demanded 3. lack of demand causes firms to decrease prices 4. expansion in demand due to falling prices 5. contraction in supply as it is less profitable for firms to produce 6. movement towards market equilibrium where the market clears SUPPLY Increase in supply 1. more is supplied at the old equilibrium price 2. supply exceeds quantity demanded 3. lack of demand causes firms to decrease prices 4. expansion in demand due to falling prices 5. contraction in supply as it is less profitable for firms to produce 6. movement towards market equilibrium where the market clears Decrease in supply 1. less of the product supplied at the old equilibrium price 2. demand exceeds quantity supplied 3. competition forces prices to increase 4. expansion in supply as it is more profitable for firms to produce 5. contraction in demand due to increasing prices 6. movement towards market equilibrium where the market clears NB Increase in demand has the same result to the economy as a decrease in supply. Similarly, a decrease in demand has the same result to the economy as an increase in supply