Supply-demand equilibrium

Definition

Supply-demand equilibrium is the point where the quantity of goods supplied equals the quantity of goods demanded in a market. At this point, there is no excess supply or demand, meaning the market is in balance. Understanding this concept is essential because it determines the price level and quantity of goods sold in a competitive market.

5 Must Know Facts For Your Next Test

1. Supply-demand equilibrium occurs at the intersection of the supply and demand curves on a graph.
2. When the market price is above the equilibrium price, a surplus occurs, causing suppliers to lower their prices.
3. Conversely, when the market price is below the equilibrium price, a shortage arises, leading to increased prices as consumers compete for limited goods.
4. Equilibrium can change due to shifts in either supply or demand caused by external factors such as technology, consumer preferences, or government policies.
5. In a perfectly competitive market, supply-demand equilibrium leads to an efficient allocation of resources, maximizing consumer and producer surplus.

Review Questions

• How does the concept of supply-demand equilibrium relate to changes in market conditions?
  • Supply-demand equilibrium reflects the balance between how much of a product consumers want to buy and how much producers want to sell. When external factors like consumer preferences or production costs change, they can shift either the supply or demand curve. For example, if a new technology makes production cheaper, it may increase supply, resulting in a new equilibrium at a lower price. Understanding these shifts helps explain how markets respond dynamically to changes.
• Analyze how surpluses and shortages affect market equilibrium and pricing strategies for businesses.
  • Surpluses occur when supply exceeds demand at a given price, leading businesses to lower prices to clear excess stock. This price adjustment moves the market back toward equilibrium. On the other hand, shortages happen when demand exceeds supply, prompting businesses to raise prices. These adjustments help realign supply with demand and ensure that resources are allocated efficiently. Businesses must be aware of these dynamics to optimize pricing strategies and inventory management.
• Evaluate the impact of government intervention on supply-demand equilibrium and its implications for market efficiency.
  • Government intervention can significantly disrupt supply-demand equilibrium through measures like price controls, taxes, or subsidies. For instance, setting a price ceiling may lead to persistent shortages by keeping prices artificially low, while a price floor can result in surpluses by preventing prices from falling to equilibrium levels. Such interventions can create inefficiencies by distorting natural market signals and leading to misallocation of resources. Evaluating these impacts highlights the delicate balance between regulation and market efficiency.

Related terms

Market Price: The price at which a good or service is sold in a competitive market, determined by the forces of supply and demand.

Surplus: A situation where the quantity supplied exceeds the quantity demanded, leading to downward pressure on prices.

Shortage: A condition where the quantity demanded exceeds the quantity supplied, resulting in upward pressure on prices.