Market Equilibrium

Definition

Market equilibrium refers to the state where the quantity supplied and the quantity demanded of a good or service are exactly equal, resulting in a stable market price and no tendency for change. This concept is central to understanding the dynamics of supply and demand in various markets.

5 Must Know Facts For Your Next Test

1. At the market equilibrium price, the quantity supplied and the quantity demanded are in balance, and there is no tendency for the price to change.
2. The market equilibrium is achieved through the interaction of supply and demand, where the forces of buyers and sellers determine the equilibrium price and quantity.
3. Shifts in the demand or supply curve can lead to changes in the market equilibrium, resulting in a new equilibrium price and quantity.
4. The four-step process of analyzing changes in equilibrium price and quantity involves identifying the initial equilibrium, determining the direction of the shift, calculating the new equilibrium, and comparing the old and new equilibria.
5. Market equilibrium is a key concept in understanding the efficiency of markets, as it represents the most efficient allocation of resources where there is no shortage or surplus.

Review Questions

• Explain the concept of market equilibrium and how it is determined through the interaction of supply and demand.
  • Market equilibrium refers to the state where the quantity supplied and the quantity demanded of a good or service are exactly equal, resulting in a stable market price and no tendency for change. This equilibrium is achieved through the interaction of supply and demand, where the forces of buyers and sellers determine the equilibrium price and quantity. At the market equilibrium price, the quantity supplied and the quantity demanded are in balance, and there is no tendency for the price to change. This represents the most efficient allocation of resources where there is no shortage or surplus.
• Describe the four-step process for analyzing changes in equilibrium price and quantity, and how shifts in demand or supply can impact the market equilibrium.
  • The four-step process for analyzing changes in equilibrium price and quantity involves: 1) Identifying the initial equilibrium price and quantity, 2) Determining the direction of the shift in demand or supply, 3) Calculating the new equilibrium price and quantity, and 4) Comparing the old and new equilibria. Shifts in the demand or supply curve can lead to changes in the market equilibrium, resulting in a new equilibrium price and quantity. For example, an increase in demand would shift the demand curve to the right, leading to a higher equilibrium price and quantity, while an increase in supply would shift the supply curve to the right, leading to a lower equilibrium price and higher quantity.
• Explain how the concept of market equilibrium is applied in the analysis of price ceilings, price floors, and the efficiency of markets.
  • The concept of market equilibrium is central to understanding the impact of price ceilings and price floors on market outcomes. A price ceiling, which is a legal maximum price, can create a shortage if set below the equilibrium price, as the quantity demanded exceeds the quantity supplied. Conversely, a price floor, which is a legal minimum price, can create a surplus if set above the equilibrium price, as the quantity supplied exceeds the quantity demanded. Market equilibrium is also a key concept in understanding the efficiency of markets, as it represents the most efficient allocation of resources where there is no shortage or surplus. At the market equilibrium, the value that consumers place on the last unit purchased (as reflected by the demand curve) is equal to the cost of producing that last unit (as reflected by the supply curve), indicating that resources are being allocated efficiently.

Related terms

Demand: The willingness and ability of consumers to purchase a good or service at different prices during a given time period.

Supply: The willingness and ability of producers to offer a good or service for sale at different prices during a given time period.

Equilibrium Price: The price at which the quantity supplied and the quantity demanded are equal, resulting in a stable market condition.