Market Equilibrium

The meeting of supply and demand results to what is referred to as “market

equilibrium”. As earlier said the market referred to here is a situation where buyers
and sellers meet, while equilibrium is generally understood as a “state of balance”.
Surplus is a condition in the market where the quantity supplied is more than the
quantity demanded.
Shortage is basically a condition in the market in which quantity demanded is higher
than quantity supplied at a given price.
Price control is the specification by the government of minimum or maximum prices
for certain goods and services, when the government considers it disadvantageous
to the producer or consumer.
Two Types of Price controls:
1. Floor Price - is the legal minimum price imposed by the government on
certain goods and services.
2. Price Ceiling - is the legal maximum price imposed by the government.
Market Equilibrium: A Mathematical Approach

Demand equation: QD = a - b (P) (1)

Supply equation: QS = a + b (P) (2)
Equilibrium condition: QD = QS (3)

Market structure refers to the competitive environment in which buyers and sellers
operate. Competition is rivalry among various sellers in the market.

Market Models Defined

1. Perfect Competition - the market has a lot of independent sellers. These

independent sellers offer the same goods. That is why they have to compete against
each other. Each seller is trying to get more profit than the others.

2. Monopoly - exists when a single firm that sells in the market has no close
substitutes. The existence of a monopoly depends on how easy it is for consumers
to substitute the products for those of other sellers.

3. Monopolistic Competition - this means there is almost a large number of small

sellers selling goods which are similar but not the same.

4. Oligopoly - is a market dominated by a small number of strategically interacting

firms. Few sellers account for most of the total production since barriers to free entry
make it difficult for new firms to enter.
Market Equilibrium

From a separate discussion of demand and supply, we now proceed with

reconciling the two. The meeting of supply and demand results to what is referred to
as “market equilibrium”. As earlier said the market referred to here is a situation
where buyers and sellers meet, while equilibrium is generally understood as a “state
of balance”.

Equilibrium

Market equilibrium generally pertains to a balance that exists when quantity

demanded equals quantity supplied. Market equilibrium is the general agreement of
the buyer and the seller in the exchange of goods and services at a particular
quantity. At equilibrium point, there are always two sides of the story, the side of
buyer and that of the seller.

For instance, given the price of P30.00 the buyer is willing to purchase 150 units. On
the seller side, he is willing to sell the quantity of 150 units at a price of P30.00. This
simple illustration simply shows that the buyer and seller agree at one particular
price and quantity, that is P30.00 and 150 units. This is the main concept of
equilibrium: that there is a balance between price and quantity of goods bought by
consumers and sold by sellers in the market.

Quantity Supplied Price Quantity Demanded

50 P 10.00 250
100 P 20.00 200
150 P 30.00 150
200 P 40.00 100
250 P 50.00 50

Equilibrium market price is the price agreed by the seller to offer its good or service
for sale and for the buyer to pay for it.

What happens when there is market disequilibrium?

When there is market disequilibrium, two conditions may happen: a surplus or a

shortage
Surplus is a condition in the market where the quantity supplied is more than the
quantity demanded. When there is a surplus, the tendency is for sellers to lower
market prices in order for the goods and services to be easily disposed from the
market. This means that there is a downward pressure to price when there is a
surplus in order to restore equilibrium in the market.

Generally, a surplus happens when there are more products sold in the market
by sellers but few products are bought by consumers. This is because the quantity of
goods that buyers are willing to buy at a given price is less than the quantity of goods
that sellers are willing to sell at the same price.

Shortage is basically a condition in the market in which quantity demanded is

higher than quantity supplied at a given price. As you may have observed in Figure
3, a shortage exists below the equilibrium point. In particular, a shortage happens
when quantity demanded is greater than quantity supplied at a given price.

When there is a shortage of goods and services in the market, there is an

upward pressure on prices to restore equilibrium in the market. In this particular
situation, it is the consumers that will influence that price to go up since they will bid
up prices in order for them to acquire the goods or services that are in short supply.
For as long as there is disequilibrium in the market, prices will still go up until such
situation is normalized.

The Law of Demand and Supply

When supply is greater than demand, price decreases;

When demand is greater than supply, price increases;
When supply is equal to demand, price remains constant.

This constant price is the equilibrium or market price. This means that buyers
and sellers agree on that price.
Price Controls

When the market is experiencing a surplus, there is a possibility that producers

will lose. Conversely, when the market is encountering shortage, there is likelihood
that consumers will be abused. What happens if disequilibrium in the market persists
for a longer period of time? If this happens, the government may intervene by
imposing price controls.
Price control is the specification by the government of minimum or maximum
prices for certain goods and services, when the government considers it
disadvantageous to the producer or consumer.

Two Types of Price controls:

1. Floor Price - is the legal minimum price imposed by the government on certain
goods and services. The setting of a floor price is undertaken by the government if a
surplus in the economy persists.
 Generally, this policy is resorted to in order to prevent bigger losses on the part
of the producers. Floor price is a form of assistance to producers by the government
for them to survive in their business.
2. Price Ceiling - is the legal maximum price imposed by the government. In most
cases, a price ceiling is utilized by the government if there is a persistent shortage of
goods in the economy. The government regularly monitors the market and imposes
a maximum price on commodities, which is to be strictly followed by producers and
sellers.
Market Equilibrium: A Mathematical Approach
In the previous discussions, we have discussed and presented market
equilibrium through graphical presentation. In this section, we will try to apply a
mathematical equation in determining the price and quantity equilibrium in the
market.
Equation:
Demand equation: QD = a - b (P) (1)
Supply equation: QS = a + b (P) (2)
Equilibrium condition: QD = QS (3)
Take note that in the said equations, there are three unknown variables: Q D, QS,
and P where QD is quantity demanded, QS is quantity supplied, and P is price.
Moreover, the parameter in equations (1) and (2) is a and the coefficient is b. Given
these equations, we can now determine the equilibrium price and quantity.
Example:
Look for the PE and QE given the following information:
QD = 68 - 6P
QS = 33 + 10P
Solving the problem, we can simply state our equilibrium equation as:
a - b(P) = a + b(P)
Substituting our values, we have:
68 - 6(P) = 33 + 10(P)
Solving for the unknown (P), we simply group like terms, thus
68 - 33 = 10P + 6P
35 = 16P
Dividing both sides by 16, we get
P = 2.19
Now we have determined the price of the goods. The next problem for us is to
determine the equilibrium quantity. Since we already know the price, all we have to
do is to substitute the value of the price to our previous equations, thus:
68 - 6 (2.19) = 33 + 10 (2.19)
Solving the equation, our Q D = QS is equal to 54.8 or we can set the value in the
whole number. Therefore, the equilibrium quantity is equal to 55 units and the
equilibrium price is P2.19.