MARKET EQUILIBRIUM

Market Equilibrium

Market Equilibrium

Market Equilibrium

Market equilibrium is a situation when the supply of a particular item is equal to its demand. The equilibrium price is the price where the intentions of buyers and sellers match. This price is the equilibrium price or market clearing price and will tend not to change unless demand or supply change. (Paul, 1983, PP68) To understand market equilibrium is to understand how it affects the United States and the global economy. The textbook reading on market equilibrium suggests the process has everything to do with supply and demand .

Market Equilibrium' Change In Any Of The Factors That Affect Buyers Or Sellers

When there are discrepancies between the amount demanded and supplied then, changes in price will follow to reduce the discrepancies that balance the market. When the price is raised higher than equilibrium then there is a surplus, when the prices are below equilibrium, then a shortage occurs. Surplus drive prices back up to equilibrium. When prices are driven down the consumer is willing to purchase the product during shortages drive prices back up to equilibrium. Real estate is a prime example of the market equilibrium process when negotiating an offer.

Price is derived by the interaction of supply and demand. The resultant market price is dependent upon both of these fundamental components of a market. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price", or a "market clearing price". (Paul, 1983, PP68) This can be graphically illustrated as follows.

In figure 1, both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At this point supply and demand are in balance or "equilibrium". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is unwilling to supply resulting in a product shortage. The end result is a rise in prices to the point P, where supply and demand are once again in balance. Conversely, if prices were to rise above P, the market would be in surplus - too much supply relative to the demand. Producers would have to lower their prices in order to clear the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P. (Hal, 1992, PP45-61)

Figure 1: Equilibrium Price

A market price is not a fair price to all participants in the marketplace. It does not guarantee total satisfaction on the part of both buyer and seller or all buyers and all sellers. This will depend on their individual competitive positions within the market. Buyers will attempt to maximize their individual well being within certain competitive constraints. Too low a price will result in excess profits for the buyer attracting competition. Likewise sellers are also considered to be profit ...