MARKET EQUILIBRIUM

The Concept of Market Equilibrium

Equilibrium means a state of equality or a state of balance between market demand and supply. Without a shift in demand and/or supply there will be no change in market price. In the diagram above, the quantity demanded and supplied at price P1 are equal. At any price above P1, supply exceeds demand and at a price below P1, demand exceeds supply. In other words, prices where demand and supply are out of balance are termed points of disequilibrium.
Changes in the conditions of demand or supply will shift the demand or supply curves.  This will cause changes in the equilibrium price and quantity in the market.


Changes in Market Demand and Equilibrium Price

The demand curve may shift to the right (increase) for several reasons:

1. A rise in the price of a substitute or a fall in the price of a complement
2. An increase in consumers’ income or their wealth
3. Changing consumer tastes and preferences in favour of the product
4. A fall in interest rates (i.e. borrowing rates on bank loans or mortgage interest rates)
5. A general rise in consumer confidence and optimism

The outward shift in the demand curve causes a movement (expansion) along the supply curve and a rise in the equilibrium price and quantity.  Firms in the market will sell more at a higher price and therefore receive more in total revenue.







Changes in Market Supply and Equilibrium Price

���� The supply curve may shift outwards if there is

1. A fall in the costs of production (e.g. a fall in labour or raw material costs)
2. A government subsidy to producers that reduces their costs for each unit supplied
3. Favourable climatic conditions causing higher than expected yields for agricultural commodities
4. A fall in the price of a substitute in production
5. An improvement in production technology leading to higher productivity and efficiency in the production process and lower costs for businesses

The entry of new suppliers (firms) into the market which leads to an increase in total market supply available to consumers


COMMENTS:

Market Equilibrium can  achieve when quantity of demand intersection between the quantity of supplied. Above the market equilibrium we called the surplus of supply and when the down of market equilibrium we called the surplus of demand.

Equilibrium Price market clearing price and will tend not to change unless demand or supply changes. The demand curve may shift to the right is because a rise in the price of a substitute, increase consumer income, changing consumer taste and cause rise in equilibrium price and quantity

Supply curve may shift outwards if there fall in cost production, government subsidies producers, fall the price of substitute, improved production technology and so on.