MARKET EQUILIBRIUM

Objectives: 
  •  identify market equilibrium, excess supply and excess demand.
  • show how the market reacts to excess supply or excess demand to reach equilibrium.
To obtain the price for a good or service we need to combine both supply and demand. When we add both supply and demand onto a graph we are able to determine the price the commodity will be sold for and how much will be sold.

Pe is the equilibrium price and Qe is the equilibrium quantity.

As long as the conditions of supply and demand do not change (ceteris paribus), then equilibrium price and quantity will not change.
 Equilibrium is where market supply is equal to market demand.

The equlibrium for a commodity is determined by market forces. Demand and Supply interacting to set the price for the commodity and how much will be sold.

Market equilibrium is where the quantity demanded and the quantity supplied are equal. At the equilibrium price the market will clear  - the quantity producers are willing to sell and the quantity consumers are willing to buy are equal.

What is market demand?

 

 

What is market supply?

A SURPLUS

A surplus or excess supply occurs where the quantity supplied is greater than the quantity demanded. This happens if the price is set too high. In order for suppliers to sell their product they will have to lower their price.

With the decrease in price the quantity supplied will fall and the quantity demanded will increase. This will lead to the price going down back to the equilibrium.

 

 

 

 

 
What happens if the price of a product is set too high?

A SHORTAGE

A shortage or excess demand occurs where the quantity demanded is greater than the quantity supplied. This happens if the price is set too low. 
With the excess demand suppliers will be able to raise the price and therefore increase their profits.

With the increase in price the quantity supplied will rise and the quantity demanded will decrease. This will lead to the price going up back to the equilibrium.