Market Equilibrium | Sahithyan's Notes

Market equilibrium occurs at the point where the demand curve and supply curve intersect.

At equilibrium:

Q_d = Q_s

The intersection determines:

Equilibrium price
The price at which quantity demanded equals quantity supplied.
Equilibrium quantity
The quantity demanded and supplied at the equilibrium price.

E the equilibrium point, where D and S intersect, at price Pₑ and quantity Qₑ.

Surplus

A surplus occurs when the market price is above the equilibrium price.

Q_s > Q_d

Producers want to sell more than consumers want to buy.

As a result, there is downward pressure on price, causing the price to fall toward equilibrium.

A shortage occurs when the market price is below the equilibrium price.

Q_d > Q_s

Consumers want to buy more than producers want to sell.

As a result, there is upward pressure on price, causing the price to rise toward equilibrium.

There are four basic types of changes:

Change	Curve Shift	Equilibrium Price	Equilibrium Quantity
Increase in Demand	Demand curve shifts right	↑	↑
Decrease in Demand	Demand curve shifts left	↓	↓
Increase in Supply	Supply curve shifts right	↓	↑
Decrease in Supply	Supply curve shifts left	↑	↓

Market price can increase because of:

Market price can decrease because of:

Sometimes demand and supply change at the same time.

Quantity must increase.

Price may:

The final effect on price depends on the relative size of the two shifts.

Price must increase.

Quantity is indeterminate.

Quantity may:

The final effect depends on the relative size of the demand and supply changes.

Markets are connected to one another.

A change in one market can affect another market, especially when goods are substitutes or complements.