Market equilibrium price
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Market equilibrium price is achieved when supply equals demand for a good. This is known as the market-clearing price. Equilibrium can be shown using supply and demand diagrams, where the equilibrium price (P*) and quantity (Q*) intersect the supply and demand curves. At the equilibrium price, the exact quantity supplied will be purchased, clearing the market efficiently without excess supply or shortage. An example equilibrium price for soft drinks is shown to be 30p, where 1000 drinks are supplied and demanded. The equilibrium can change if demand or supply changes, incentivizing sellers to raise or lower prices accordingly to re-establish equilibrium.
Market equilibrium price
- 1. MARKET EQUILIBRIUM PRICE AbhishekGiri (B.Sc., M.F.Sc.) Lecturer in the Department of Aquaculture Management Prabhat Kumar College, Contai
- 2. DEFINITION A situation where for a particular good supply = demand. When the market is in equilibrium, there is no tendency for prices to change. We say the market-clearing price has been achieved. At most prices, planned demand does not equal planned supply. This is a state of disequilibrium because there is either a shortage or surplus and firms have an incentive to change the price.
- 3. MARKET EQUILIBRIUM DIAGRAM • Market equilibrium can be shown using supply and demand diagrams • In the diagram below, the equilibrium price is P*. The equilibrium quantity is Q*.
- 4. MARKET CLEARING • Equilibrium price is also called market clearing price because at this price the exact quantity that producers take to market will be bought by consumers, and there will be nothing ‘left over’. This is efficient because there is neither an excess of supply and wasted output, nor a shortage – the market clears efficiently.
- 5. EXAMPLE • Equilibrium • As can be seen, this market will be in equilibrium at a price of 30p per soft drink. At this price the demand for drinks by students equals the supply, and the market will clear. 1000 drinks will be offered for sale at 30p and 1000 will be bought – there will be no excess demand or supply at 30p. PRICE Q. SUPPLIED Q. DEMANDED 80 2000 0 70 1800 200 60 1600 400 50 1400 600 40 1200 800 30 1000 1000 20 800 1200 10 600 1400 0 400 1600 The weekly demand and supply schedule for a brand of soft drink at various prices (between 0 to 80p)
- 7. HOW IS EQUILIBRIUM ESTABLISHED • At a price higher than equilibrium, demand will be less than 1000, but supply will be more than 1000 and there will be an excess of supply in the short run. • Graphically, we say that demand contracts inwards along the curve and supply extends outwards along the curve. Both of these changes are called movements along the demand or supply curve in response to a price change.
- 8. CHANGES IN EQUILIBRIUM PRICE Q.SUPPLIED Q.DEMANDED NEW Q.DEMANDED 80 2000 0 400 70 1800 200 600 60 1600 400 800 50 1400 600 1000 40 1200 800 1200 30 1000 1000 1400 20 800 1200 1600 10 600 1400 1800 0 400 1600 2000 • At the higher level of demand, keeping the price at 30p would lead to an excess of demand over supply, with demand at 1400 and supply at 1000, with an excess of 400. This will act as an incentive for the seller to raise price, to 40p. Equilibrium will now be re-established at the higher price. if there is a particularly hot summer, students may prefer to drink more soft drinks at all prices, as indicated in the new demand schedule, QD1 .