Market Equilibrium

Market Equilibrium

The point where quantity demanded equals quantity supplied; the market’s “sweet spot” where buyers and sellers agree on price and quantity.

Equilibrium Price (P*)

The price at which the demand and supply curves intersect.

Equilibrium Quantity (Q*)

The amount of goods bought and sold at the equilibrium price.

Shortage (Excess Demand)

When quantity demanded (QD) is greater than quantity supplied (QS); happens when the price is too low.

Effect of Shortage

Sellers raise prices, reducing demand and increasing supply until equilibrium is restored.

Surplus (Excess Supply)

When quantity supplied (QS) is greater than quantity demanded (QD); happens when the price is too high.

Effect of Surplus

Sellers lower prices to attract buyers and clear out extra inventory, moving the market back to equilibrium.

Increase in Demand

Causes both equilibrium price and quantity to rise.

Decrease in Demand

Causes both equilibrium price and quantity to fall.

Increase in Supply

Causes equilibrium price to fall and equilibrium quantity to rise.

Decrease in Supply

Causes equilibrium price to rise and equilibrium quantity to fall.

Causes of Demand Shift

Changes in income, consumer preferences, population, or expectations.

Causes of Supply Shift

Changes in production cost, technology, or natural events (e.g., typhoons).

Price Regulation

Government setting price limits to protect consumers or sellers.

Suggested Retail Price (SRP)

Recommended price by the government (DTI) for essential goods to prevent overpricing.

Sin Taxes

High taxes on harmful goods (like alcohol and cigarettes) to discourage consumption.

Government Intervention

Actions taken by the government to stabilize markets and protect consumers.

Food and Drug Administration (FDA)

Monitors and licenses food and drugs to ensure safety and prevent harmful products.

National Food Authority (NFA)

Ensures stable rice supply; imports rice when shortages occur.

Traffic Regulations (Coding Scheme)

Government strategy to control vehicle demand and reduce congestion.

Market Disequilibrium

A state where demand and supply are not equal, leading to either shortage or surplus.

Purpose of Government Intervention

To maintain market stability, prevent unfair pricing, and ensure consumer safety.

External Factors Affecting Equilibrium

Income, weather, technology, taxes, or government policies.

Example of Shortage

During holidays, high demand for goods like ham or gifts causes prices to rise.

Example of Surplus

After a season ends, leftover clothes are sold on clearance sale to reduce inventory.