Market equilibrium

Market equilibrium:

645_equilibrium price.jpg

Figure: Equilibrium Price


P = price
Q = quantity of good
D = demand
S = supply
PE = equilibrium price or price of market balance
D>S = Excess of demand = whenever P< PE
S>D = Excess of supply whenever P> PE

Market equilibrium can as well be described with help of figure shown above. Equilibrium price is P. At price P, the quantity demanded is equivalent to the quantity supplied, i.e., D=S. At other prices, there is no equality among quantity demanded and quantity supplied. In both situations either the consumer or the firms are disappointed and tend to modify the price.

At any price above equilibrium price (i.e., PE), supply is more than demand (i.e., S>D). Therefore there is surplus supply. Whenever price is very high, buyers prefer to decrease their purchase. However sellers prefer to trade more as price is high. Such contrasting behaviors of buyers and sellers outcome in surplus supply in the market that is the difference among the quantities demanded and quantity supplied. Since sellers can’t sell all of the quantity at high price, some of them might diminish price to sell the surplus stocks.

For illustration, price “discounts” are advertised by sellers by the name of ‘annual stock clearance’ sales. Whenever one seller provides discount, the other sellers also follow suit by cutting their costs. As an outcome, the market price as an entire will decline till the surplus supply is sold and equilibrium is (i.e., D=S) restored.

Likewise, when the price is below the equilibrium price PE, there will be surplus demand, D>S. In this situation some of the buyers might try to bid up the price to purchase some more quantity whenever supply is less. This might also encourage sellers to supply more. For illustration, buying cinema tickets off the counter (termed as tickets in black) by paying a higher price than the real price.

Therefore, in both situations, the actions of buyers and sellers will move the price either upwards or downwards and remove the surplus demand or surplus supply. Such actions too restore the demand-supply balance to achieve the market equilibrium. At equilibrium price, there is no force to modify the price or quantity required of a commodity.

The figure shown above illustrates the market in equilibrium at the equality among demand and supply. In circumstances of any deviation from the equilibrium price, the direction of price movement is illustrated by the arrow marks. Whenever there is excess supply, price has a downward tendency. In the situation of excess demand, price has an upward tendency. At equilibrium, price is stable since there is no tendency for transform as D=S.


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