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Market Equilibrium

Definition

Market equilibrium occurs when the quantity demanded by buyers equals the quantity supplied by sellers at a specific price. It represents a state of balance where there is no tendency for prices or quantities to change.

Analogy

Imagine market equilibrium as a seesaw perfectly balanced with buyers on one side and sellers on the other. When both sides exert equal force, there is no movement, indicating that supply and demand are in harmony.

Related terms

Surplus: A surplus occurs when the quantity supplied exceeds the quantity demanded at a given price, leading to downward pressure on prices.

Shortage: A shortage happens when the quantity demanded exceeds the quantity supplied at a given price, resulting in upward pressure on prices.

Price Elasticity of Demand/Supply: Price elasticity measures how responsive demand or supply is to changes in price. It helps determine the magnitude of changes in quantity demanded or supplied when prices change.