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Market equilibrium is the state of equilibrium that exists when the opposing market forces of demand and supply achieve a balance with no inherent tendency for change. Once achieved, a market equilibrium persists unless or until it is disrupted by an outside force, especially the demand and supply determinants. A market equilibrium is indicated by equilibrium price and equilibrium quantity.
In general, equilibrium is the balance of opposing forces. For market equilibrium, the opposing forces are demand and supply. Buyers seek to buy at a lower price and sellers seek to sell at a higher price. The balance of these two forces generates a price and a quantity that are mutually agreeable to both sides.
Market Equilibrium, Numerical Analysis
An analysis of market equilibrium is using a table of numbers that combines a demand schedule and a supply schedule. A numerical analysis of the market is used to ascertain information such as market equilibrium, equilibrium price, equilibrium quantity, shortage, and surplus. This is one of two basic methods of analyzing market equilibrium. The other is a graphical analysis using demand and supply curves.
Working through a limited set of numbers that reflects demand and supply can be an effective way to grasp the basic workings of a market exchange. A numerical analysis of the market combines the demand schedule, which captures the demand side, with a corresponding supply schedule, which illustrates the supply side.
Setting the Stage
The location of the market to be studied is the Shady Valley Exposition Center. The event is the 88th Annual Trackmania 8-Track Tape Collectors Convention. The purpose is the exchange of 8-track music tapes filled with the works of classic performers such as The Carpenters and Englebert Humperdink. The Center is filled with 8-track buyers and 8-track sellers.
Although the task is not an easy one, the buying and selling inclinations of these "tracksters" can be summarized into a table that combines the buyers' demand schedule with the sellers' supply schedule. The table in the exhibit at the right provides such a summary.
A few observations about this table are in order:
The price of 8-track tapes ranges from a low of 10 cents to a high of 90 cents.
The quantity demanded ranges from a high of 800 tapes, at the 10-cent price, to a low of 0 tapes, at the 90-cent price. This inverse relation between price and quantity demanded is the law of demand.
The quantity supplied ranges from a low of 0 tapes, at the 10-cent price, to a high of 800 tapes, at the 90-cent price. This direct relation between price and quantity supplied is the law of supply.
To while away the time, it might be interesting to play the economic game of "What if?" That is, what occurs if the market price is 30 cents, 50 cents, 70 cents, or some other price?
30 Cents: Consider first a 30 cent. At this price, the quantity demanded is 600 tapes and the quantity supplied is 200 tapes. This does not seem to be equilibrium. The buyers cannot buy all that they want. They want to buy 600 tapes, but only 200 tapes are offered for sale by the sellers. This situation, termed a shortage, actually motivates buyers to change the price, to offer a higher price. But equilibrium means that the price does not change. This price is NOT equilibrium.
70 Cents: Now consider a 70 cent. At this price, the quantity demanded is 200 tapes and the quantity supplied is 600 tapes. This does not seem to be equilibrium, either. But now the sellers cannot sell all that they want. They want to sell 600 tapes, but only 200 tapes are purchased by the buyers. This situation, termed a surplus, motivates sellers to change the price, to charge a lower price. But once again, equilibrium means that the price does not change. This price is NOT equilibrium either.
Neither price is suitable. Either the buyers are not able to buy what they want or the sellers are not able to sell what they have. This market is not in equilibrium at either price. One side or the other is left wanting, which prompts the unsatisfied side to take corrective action, action that alters the price. A changing price is a sure sign that the market is not at equilibrium.
If a 30 cent price is so low that it triggers a price increase and a 70 cent price is so high that it triggers a price decrease, then perhaps a price between these two would achieve an equilibrium balance.
What about a 50 cent price? At this price, the quantity demanded is 400 tapes and the quantity supplied is 400 tapes. This looks promising. The buyers can buy all that they want. The sellers can sell all that they want. Neither buyers nor sellers are motivated to change the price. The forces of demand and supply appear to be in balance.
As a matter of fact, the 50 cent price IS the equilibrium price. At 50 cents, the quantity demanded is equal to the quantity supplied. This is the ONLY price that achieves a balance between these two quantities. Best of all, because this is equilibrium, the equilibrium price of 50 cents does not change and the equilibrium quantity of 400 tapes does not change unless or until an external force intervenes.
Market equilibrium is the balance between buyers trying to move the price down and sellers trying to move the price up. When the two forces are in balance, the "yellow flag" or price does not budge. The unmoving price is not actually yellow, but it is the equilibrium price.
Specifically equilibrium price is the price that exists when the market is in equilibrium.
Paired with the equilibrium price, is the equilibrium quantity which is the quantity exchanged between buyers and sellers when the market is in equilibrium.
There is more, however, to equilibrium price and quantity than yellow flags. The equilibrium price is also equal to BOTH the demand price and supply price. Moreover, the equilibrium quantity is equal to BOTH the quantity demanded and quantity supplied.
As a matter of fact, equilibrium price and equilibrium quantity result when the demand and supply prices are equal AND the quantities demanded and supplied are equal. And this is ONLY achieved at the intersection of the demand and supply curves. This market equilibrium is illustrated in the accompanying market diagram.