equilibrium(SEC A)

Market Equilibrium

  • Definition: Market equilibrium occurs when quantity demanded (Dx) equals quantity supplied (Sx).

  • Key Results:

    • Equilibrium Price: The price at which the market clears.

    • Equilibrium Quantity: The quantity that leaves no excess demand or supply.

Determination of Market Equilibrium Under Perfect Competition

  • Forces Involved: Market demand and market supply.

    • Market Demand: Total demand by all buyers. Indicated by demand schedule/curve.

    • Market Supply: Total supply by all firms. Indicated by supply schedule/curve.

  • Equilibrium Condition: Established when quantity demanded equals quantity supplied at the prevailing price.

Table 1: Market Equilibrium Example

Price

Quantity Demanded (Dozen)

Quantity Supplied (Dozen)

5

10

50

4

20

40

3

30

30 (Equilibrium)

2

40

20

1

50

0

Observations from Table 1

  • At Price 5: Excess supply leads to a fall in price.

  • Price Reduction Consequences:

    • If price falls to 4: Quantity demanded rises, quantity supplied falls.

    • If price falls to 3: Quantity demanded = Quantity supplied, equilibrium established.

Excess Supply and Excess Demand

  • Excess Supply: Occurs when supply exceeds demand at a given price.

    • Leads to downward pressure on prices.

  • Excess Demand: Occurs when demand exceeds supply.

    • Leads to upward pressure on prices.

Shift (Change) in Demand and Market Equilibrium

Increase in Demand

  • Demand curve shifts right (D to D1).

  • Results: Equilibrium price and quantity both increase.

Decrease in Demand

  • Demand curve shifts left (D to D2).

  • Results: Equilibrium price and quantity both decrease.

Shift (Change) in Supply and Market Equilibrium

Increase in Supply

  • Supply curve shifts right (S to S1).

  • Results: Equilibrium quantity increases, price decreases.

Decrease in Supply

  • Supply curve shifts left (S to S2).

  • Results: Equilibrium quantity decreases, price increases.

Simultaneous Shift in Demand & Supply

  • Cases:

    1. Simultaneous Increase: Quantity rises, price change depends on which increase is greater.

    2. Simultaneous Decrease: Quantity falls, price change depends on which decrease is greater.