Market Equilibrium

Market equilibrium is a situation that occurs when the seller’s production and the buyer’s demand for a particular product are equal. If the amount demanded equals the quantity provided at the market price, the market is in balance. The market equilibrium cost or market-clearing price is the price at which the amount requested equals the quantity supplied, and the corresponding amount is the rate constant.

Market Assumptions

The following are the six most important market assumptions:

• A market is distinguished by a single type of product or service.
• In a market, all commodities or services bought and sold are identical.
• The items or services sold in a single market have a single price.
• All customers are well-informed about the product.
• Buyers and sellers have solid working relationships.
• Only buyers and sellers are aware of the transaction’s costs and rewards.

These assumptions are simple to comprehend. They ensure that purchasers who value the product more than its price will find a buyer.

Equilibrium in the Market

The situation of market equilibrium occurs when the seller’s production and the buyer’s demand for that product are equal. By setting the demand equal to the supply, we can calculate the equilibrium price. The price at which the quantity demanded equals the quantity provided is the equilibrium price.

The supply curve represents the quantity supplied at any price. In contrast, the demand curve depicts the quantity desired at any price. So, they share one price in common on the graph, which is at the intersection of the two curves.

Consider the following function to explain the demand curve for a headphone:

1800 – 20P = QD

When designing graphs of functions, keep in mind that the independent variable should be on the horizontal axis, and the dependent variable should be on the vertical axis. When drawing supply and demand curves, we always draw the amount on the horizontal axis and the price on the vertical axis. As a result, drawing the demand relationship as an inverse demand curve is easier. In this case, the demand curve is represented as a function of quantity or price. In our case, this would be P = 90.

The supply curve is defined as the price as a function of product quantity. The inverse supply curve is obtained from the following equation in this case:

QS = a + bP – cW

The vertical intercept, $20, indicates the lowest price at which a vendor will sell his television. Supply would be impossible at prices of $20 or less. As a result, the equilibrium price should be anywhere between $20 and $90.

We only need to put QD = QS and solve to discover the equilibrium price and quantity. We must determine the price at which this equality can be achieved. Setting QD = QS has the following results in our example:

1800 – 20P = 50P – 1000

or

70P = 2800

or

P = $40

At P = $40, the quantity demanded at the demand curve would be: 

QD = 1800 – 20(40) = 1000

Similarly, at P = $40, the quantity supplied at the supply curve would be:

QS = 50(40) – 1000 = 1000.

Example of market equilibrium

A business produces 10,000 shirts and sells them for $12 each. However, no one is willing to pay so much for them. The store lowers its pricing to $10 to increase demand. At that price bracket, there are 250 buyers. As a result, the store further lowers the retail price to $7 and attracts a total of 500 customers. One thousand people buy the shirts when the price is reduced further to $5. 

So, we can say that the supply and demand are equal at this price. Hence, $5 is the shirt’s equilibrium price.

Conclusion

In the above topic, we have discussed the concept of market equilibrium. It is an extremely important concept that can help understand the concept of pricing of goods based on supply and demand. A situation of market equilibrium occurs when the seller’s production and the buyer’s demand for a particular product are equal. We can then calculate the equilibrium price by setting the demand equivalent to the supply. The cost at which the demand curve equals the quantity provided is known as the equilibrium price.