Market Equilibrium

In a market system, prices for goods/services are determined by the interaction of demand & supply 

• A market is any place that brings buyers & sellers together

• Markets can be physical (e.g. McDonald's) or virtual (e.g. eBay)

  
  
  
  

• Buyers and sellers meet to trade at an agreed price

  • Buyers agree the price by purchasing the good/service

  • If they do not agree on the price then they do not purchase the good/service and are exercising their consumer sovereignty

    
    
    
    

• Based on this interaction with buyers, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties

  • At the equilibrium price, sellers will be satisfied with the rate/quantity of sales

  • At the equilibrium price, buyers are satisfied that the product provides benefits worth paying for

Equilibrium Graph

• Equilibrium in a market occurs when demand = supply

• At this point the price is called the market clearing price

  • This is the price at which sellers are clearing (selling) their stock at an acceptable rate

• Any price above or below P creates disequilibrium in this market

• Disequilibrium occurs whenever there is excess demand or excess supply in a market

• Any points outside p is either profitable for the consumers or the producers

  
  
  
  

Market Disequilibrium - Excess Demand

• Excess demand occurs when the demand is greater than the supply

  • It can occur when prices are too low or when demand is so high that supply cannot keep up with it

Diagram Analysis

• At a price of P1, the quantity demanded of electric scooters (Qd) is greater than the quantity supplied (Qs)

• There is a shortage in the market equivalent to QsQd