EQUILIBRIUM M.Y.

Gondal
EQUILIBRIUM
The dictionary defines the word equilibrium as a situation in which various forces are in
balance—and this also describes a market’s equilibrium.

MARKET’S EQUILIBRIUM
The point at which the supply and demand curves intersected each other. This point is called
the market’s equilibrium.

EQUILIBRIUM PRICE
The price at this intersection is called the equilibrium price. At the equilibrium price, the
quantity of the good that buyers are willing and able to buy exactly balances the quantity that
sellers are willing and able to sell. The equilibrium price is sometimes called the market-
clearing price because, at this price, everyone in the market has been satisfied: Buyers have
bought all they want to buy, and sellers have sold all they want to sell.

EQUILIBRIUM QUANTITY
The price at this intersection each other that point of quantity is called the equilibrium
quantity. In other words the quantity supplied and the quantity demanded at the equilibrium
price

THE EQUILIBRIUM OF SUPPLY AND DEMAND

The equilibrium is found where the supply and demand curves intersect. At the equilibrium
price, the quantity supplied equals the quantity demanded.

Illustration
In following graph the equilibrium price is $2.00: At this price, 7 ice-cream cones are
supplied, and 7 ice-cream cones are demanded.

MARKETS NOT IN EQUILIBRIUM

Sometimes the market is not in equilibrium-that is quantity supplied doesn't equal quantity
demanded. When this occurs there is either excess supply or excess demand.
1. Excess Supplies is known as “Market Surplus”
2. Excess demand is known as “Market Shortage”

MARKET SURPLUS
A condition in the market in which the quantity demanded is less than the quantity supplied at
the existing price. Because sellers are unable to sell as much of the good as they want, a
surplus generally causes a decrease in the market demand due to high market price. To sale

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EQUILIBRIUM M.Y.Gondal
their surplus supplies supplier reduce the prices, in turn, increase the quantity demanded
which then acts to restore equilibrium.

Illustration
Suppose first that the market price is above the equilibrium price, as in following graph. At a
price of $2.50 per cone, the quantity of the good supplied (10 cones) exceeds the quantity
demanded (4 cones).
There is a surplus. Because the market price of $2.50 is above the equilibrium price, the
quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to
increase sales by cutting the price of a cone, and this moves the price toward its equilibrium
level.

MARKET SHORTAGE
A condition in the market in which the quantity demanded is greater than the quantity
supplied at the existing price. Because a situation where most people are unable to find a
desired good at an affordable price. A shortage is sometimes called a situation of excess
demand. With too many buyers chasing too few goods, sellers can respond to the shortage by
raising their prices without losing sales. These price increases cause the quantity demanded to
fall and the quantity supplied to rise, which then acts to restore equilibrium.

Illustration
Suppose now that the market price is below the equilibrium price, as in following graph. In
this case, the price is $1.50 per cone, and the quantity of the good demanded (10 cones)
exceeds the quantity supplied (4 cones). There is a shortage. Because the market price of
$1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity
supplied (4 cones). With too many buyers chasing too few goods, suppliers can take
advantage of the shortage by raising the price. Hence, in both cases, the price adjustment
moves the market toward the equilibrium of supply and demand.

EQUILIBRIUM CAN SHIFT

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EQUILIBRIUM M.Y.Gondal
Due to change in supply or demand or both then the cutting point of demand curve and supply curve
will be change. The new point where both curve will cut each other will be known as new equilibrium
point and change in known as change in equilibrium point. This change is classified in three
categories.
 Demand Curve Shifts
 Supply Curve Shifts
 Both Shifts

These three categories are classified in broadly. These three categories lead to too many sub
categories. But we will just 4 sub categories, one form Demand curve shift, one from supply curve
shift and two from both shifts.

Demand curve shift

Demand increases but supply will not change= ↑D ~S

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Supply curve shift

Supply decreases but demand will not change= ~D ↓S

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EQUILIBRIUM M.Y.Gondal
Both curve shift
(A) Demand increases more but supply increase less= ↑↑D ↑S

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(B) Supply decreases more but demand decrease less= ↓D ↓↓S

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