Market Equilibrium – With Examples & Graph
What is the market equilibrium?
Market equilibrium definition
Market equilibrium can be identified as the market condition where market supply and demand equals to each other. In other words, market equilibrium occurs when the demand for a particular good equals its supply. For a market equilibrium example,at the price of $3 both supply and demand are 600 000 bushels of wheat.
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What is the difference between supply vs quantity supplied?
What is the difference between demand and quantity demanded?
when is a market in equilibrium?
A market is in equilibrium when the demand equals to the supply.
what is the equilibrium price and equilibrium quantity?
What is the equilibrium price?
Equilibrium price means the market price of a particular good when it is in the equilibrium. The equilibrium price in a market is found where the point demand equals to supply.
What is the equilibrium quantity?
Equilibrium quantity means the number of units are sold of a particular good at the market equilibrium point.
In this situation, there is no tendency to increase or decrease market price per unit and number of goods. So, when market is in the equilibrium, there is no surplus or shortage.
What determines market price and equilibrium output in a market?
Demand and supply of a particular good determine market price and equilibrium output in a market.
Are markets always in equilibrium?
No, market equilibrium occurs when the demand of a particular good equals its supply.
If a market is not at equilibrium, there must be a surplus or shortage of that market.
Surplus means the situation where supply exceeds the demand. A surplus is occurred when market price is above the equilibrium price.
Shortage means the situation where demand exceeds the supply. A shortage is occurred when market price is below the equilibrium price.
Examples of Market Equilibrium
Market Equilibrium Example 1: How to find market equilibrium from a table?
Following table shows the demand and supply schedule the wheat market in USA. Prices of wheat bushel are presented in $ while demand and supply of wheat are presented in 000 of bushels.
| Price (in $) | Demand (in 000 of bushels) | Supply (in 000 of bushels) |
| 0 | 1200 | 0 |
| 1 | 1000 | 200 |
| 2 | 800 | 400 |
| 3 | 600 | 600 |
| 4 | 400 | 800 |
| 5 | 200 | 1000 |
| 6 | 0 | 1200 |
According to the above market equilibrium example, what is the equilibrium price and quantity in this market?
Market equilibrium occurs when the demand of a particular good equals its supply. So, in this table, at price of $3 both supply and demand are 600 000 bushels of wheat.
So, the equilibrium price in this market is $3. The equilibrium quantity in this market is 600 000 bushels of wheat.
Market Equilibrium Example 2: Graphing market equilibrium
Assume that the following market equilibrium graph graphically presents the market equilibrium of example 1.
According to the above graph, below the price of $3, the supply for wheat is lower than the demand for wheat. So, we can see there is an excess demand for wheat before the price of $3. Also, there is a tendency to increase both price and quantity.
Above the price of $3, the supply for wheat is higher than the demand for wheat. It shows an excess supply for wheat after the price of $3. Also, there is a tendency to decrease both price and quantity.
But in point “E” supply and demand for the wheat equals to each other. There is no tendency to change them. So, we can say that equilibrium for the wheat market is laying on point “E” and equilibrium price equals $3 per a bushel of wheat and equilibrium quantity equals to 600 000 bushels of wheat.
Market Equilibrium Example 3: How to calculate market equilibrium using the market equilibrium formula?
Market equilibrium formula
As we discussed in above market equilibrium occurs when the demand of a particular good equals its supply.
So, market equilibrium formula is,
Quantity of supplied (Qs)= Quantity of demanded (Qd).
Lets get calculate market equilibrium using the market equilibrium formula.
Assume that,
Qs = -5000 + 4000P
Qd = 5000 – 1533P
How to find market equilibrium price?
The equilibrium price in the market is determined by formula of Qs=Qd
Qs = Qd
-5000 + 4000P= 5000 – 1533P
4000P + 1533P = 5000+5000
5533P = 10000
P = $1.81
According to this example of market equilibrium, the equilibrium price is $1.81
How to find market equilibrium quantity?
Qs= -5000 + 4000P
QS = -5000 + (4000* 1.81)
Qs= 2229
According to this example of market equilibrium, the equilibrium quantity is 2229.
Change in market equilibrium
In the earlier section we identified that, when the market is in an equilibrium situation, there is no tendency to change it. But if the factors affecting the demand and supply changes, market equilibrium can be changed as a result of shifting the demand and supply curves.
What are the four basic causes for a shift in market equilibrium?
There are four basic causes for the shift in market equilibrium. They are,
Increase in demand
Factors such as an increase in consumer income, increase in consumer taste, increase in prices of rival goods and decrease in prices of complementary goods cause the increase in demand. An increase in demand will shift the demand curve to the right.
As an example, if the income of car consumers in USA increases, the market demand curve of cars will shift to rightward as shown in the following graph.
Before the income increase of consumers, equilibrium laid on the E1. The equilibrium price was P1 and the equilibrium quantity was Q1. Then after the consumer income is increased, the equilibrium of the rice market has been laid on E2. Both equilibrium price and quantity have been increased to P2 and Q2 respectively.
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GDP per capita (current US$) – United States
Decrease in demand
Factors such as a decrease in consumer income, decrease in consumer taste, decrease in prices of rival goods, and increase in prices of complementary goods cause decrease in demand. A decrease in demand will shift the demand curve to the left.
Increase in supply
Factors such as the decrease in input prices, technological improvements, and government subsidies cause increase in supply. An increase in supply will shift the supply curve to the right.
As an example, if the technology of wheat producers in USA is improved, the market supply curve of wheat will shift rightward. It can be described using the following graph.
Before the improvement of the technology of rice producers in USA, market equilibrium is on the E1. The equilibrium price was P1 and the equilibrium quantity was Q1. Then after the improvement of the technology of rice producers, equilibrium has been moved to E2. Equilibrium price has been decreased to P2 and quantity has been increased to Q2.
Decrease in supply
Factors such as the increase in input prices, technological disruptions, and government taxes cause decrease in supply. A decrease in supply will shift the supply curve to the left.
