EQUILIBRIUM

Equilibrium is a situation in which two forces are balanced and in the absence of external
influences the (equilibrium) values of variables will not change. For example, in the standard
textbook model of perfect competition, equilibrium occurs at the point at which quantity
demanded and quantity supplied are equal. Market equilibrium in this case is a condition
where a market price is established through competition such that the amount of goods or
services sought by buyers is equal to the amount of goods or services produced by sellers.
This price is often called the competitive price or market clearing price and will tend not to
change unless demand or supply changes, and the quantity is called the "competitive
quantity" or market clearing quantity.

CHANGE IN EQUILIBRIUM

When a market is in equilibrium, the price of a good or service tends to stay the
same. Equilibrium is the price at which the quantity demanded by consumers is equal to the
quantity that's supplied by suppliers. When either demand or supply changes, however, the
equilibrium price and quantity will also change, this is called change in equilibrium
Overview of Changes in Equilibrium

Shift in Demand curve (when supply remains unchanged): A shift of Demand-curve to the
right implies an increase in the quantity demanded, thus increasing the value of Equilibrium
point. While a left shift implies a decrease in demand, and decrease in the Equilibrium point.

Shift in Supply curve (when demand is unchanged): A shift in Supply-curve to the right
implies an increase in the supply & decrease in equilibrium, while the left shift implies a
decrease in supply, & increase in Equilibrium.

Eg: Imagine that Steven manufactures flat screen televisions. His best seller is a 75-inches
wide model. This plasma model wholesales to retailers all over the world for $3,500.
Unexpectedly, new improvements to the machines that manufacture the TVs are made and
faster shipping processes have been implemented. Under some circumstances this would be a
good thing, but Steven wasn’t prepared and his plasma warehouse is becoming oversaturated
a bit too quickly with 75-inch televisions.

The new improvements to the inputs in the market have led competitors to also offer the same
size televisions. Steven is very upset because he will now have to re-evaluate how much he
will have to lower his prices to account for the now excess amount of 75-inch plasma TVs
that will hit the retailers.

Steven runs a few numbers and makes the decision to lower his wholesale price to $3,250 and
see how they respond. He also spoke to his production team and told them to cut production
down by 35% for the next month to clear out the surplus inventory. At the end of the month,
Steven reviewed the numbers. The price reduction appeared to have worked. He had no
unsold televisions and managed to get rid of all of the plasma TVs in his inventory.

He discovered the market equilibrium between retailers and producers for the televisions. The
retailers purchased all of the TVs from Steven at his offered price leaving him
without surplus or shortage. The supply was just right to meet the demand at that price point.
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