Market Equilibrium

Market Equilibrium

Introduction

Market equilibrium is a situation on the market, when demand for goods is equal to its proposal, the volume of the product and its price is called the equilibrium price or market clearing. This price has a tendency in the absence of changes in supply and demand remains unchanged.

Discussion

Market Equilibrium

All markets are characterized by market participants making decisions to improve their own self-interest. As noted earlier, buyers are assumed to be motivated primarily by the desire to increase their personal satisfaction in life. Sellers are assumed to be motivated by the desire to make the largest profits possible. This interaction between buyers and sellers results in equilibrium in the market. Equilibrium is defined to be the point at which Qs = Qd at a common price. If the market price is not at equilibrium, market forces drive the market toward equilibrium. If the market price is at equilibrium, there exists no market pressure to move to some other level. To better understand this concept, consider Figure 1.1.

Market Equilibrium(figure 1.1)

The market represented in Figure 1.1 is in equilibrium at point E because Qs = Qd at the common price of P 1. To better understand the concept of equilibrium, it is useful to examine the market at other prices. First, consider a market price above the equilibrium value. At P 2, the quantity supplied, Q 3, is larger than the quantity demanded, Q 2. At this price, sellers are willing to provide more to the market than consumers are willing to buy. This situation is defined as a surplus. To combat their rising inventories, sellers begin to lower their prices, attempting to entice consumers to buy more. In addition, because of the lower price, sellers decrease the amount they offer for sale. As this process unfolds, there is an increase in Qd and a decrease in Qs as the market moves to the equilibrium at point E.

Now consider a market price below the equilibrium value. At the price P 3, the quantity demanded, Q 3, exceeds the quantity supplied, Q 2, resulting in a shortage in the market. In response to the shortage, consumers begin to bid up the price. To understand this process, consider the process of an auction. An auction usually begins with the number of willing and able buyers exceeding the amount of product available. The role of the auctioneer is to bid the price up ...