Market In Equilibrium

Market equilibrium refers to a situation where there is no tendency to change. It exists when the opposing forces of demand and
supply are in balance and shows the market is at rest indicating that there is neither any overproduction nor underproduction. This
can only be achieved where the producers are willing and able to supply the same quantity of goods that consumers are willing and
able to purchase.
To understand this concept clearly, it is important to take observations from the following diagram that will be followed by a thorough
explanation;

The Market Will Always Converge To Equilibrium!

As seen from the graph, the point at which the demand curve intersects the supply curve is known as the equilibrium price P1 at the
quantity Q*. This is also known as the market-clearing price ( the price at which all quantities of goods will be purchased by the
buyers). The demand curve shows how much consumers are willing to pay while the supply curve tells how much producers are
willing to sell at each price

To understand why the market always converges to equilibrium, suppose the price was initially above the market-clearing price,
"P2". At this price, there is surplus supply as the qty that suppliers want to produce is greater than the quantity consumers want to
buy. As unsold goods accumulate, the suppliers will decrease the price to encourage price-sensitive consumers to buy more of it.
Hence, the price will fall until the qty the consumers wish to buy equals to the qty that firms are prepared to buy. This will put
downward pressure on the price until the equilibrium price is achieved in the market.

Now, assume that the price is initially below the market-clearing price, " P3". At this price, there is an acute shortage as the qty that
consumers want is less than what is currently being supplied by the producers. In such a case, the consumers will start offering a
higher price for the good so that they are not among those who don't have it. As a consequence, the firms will get encouraged to
increase their price and expand output for earning supernormal profits. Hence, the price will rise until the qty that consumers desire
to buy is equal to the qty firms are ready to supply. This will put upward pressure on the price until the equilibrium price is achieved.

This equilibrium price will remain unchanged as long as the demand and supply conditions don't change. If either of them changes,
then a new equilibrium will be formed. Let's assume that the demand for cars rises due to a massive increase in disposable income,
or any other factor that may affect its demand. A new equilibrium price and quantity will be determined as illustrated below;
A rightward shift in the demand curve from D to D1 will cause the price to increase from P to P1. Initially, there will be a shortage of
cars at the original price P. As the firms start to increase the supply of cars in the market, there will be an upward movement along
the supply curve. Simultaneously, there will be also an upward movement along the demand curve D1 as households wish to have
more cars.

As these movements start, the price and quantity supplied will increase. It will end at that point where the qty producers want to
supply is the same as the qty consumers want to buy (the demand curve intersects the supply curve again). This gives our new
equilibrium price that is now P1 and a new equilibrium quantity that is now Q1.