MARKET

EQUILIBRIUM

Presented by: Nuur’Amin

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 What is market equilibrium?
• A market is said to have reached equilibrium price when the supply of
goods matches demand.

• Equilibrium is achieved at the price at which quantities demanded

and supplied are equal. We can represent a market in equilibrium in a
graph by showing the combined price and quantity at which the
supply and demand curves intersect.

• A market in equilibrium demonstrates three characteristics : the

behavior of agents is consistent, there are no incentives for
agents to change behavior, and a dynamic process governs
equilibrium outcome.
 Notes on Equilibrium
 Economists like Adam Smith believed that a free mark​
et would trend towards equilibrium. For example, a
dearth of any one good would create a higher price
generally, which would reduce demand, leading to an
increase in supply provided the right incentive. The  ADAM
same would occur in reverse order provided there was
excess in any one market. SMITH
 As noted by Paul Samuelson in his 1983 work
Foundations of Economic Analysis, the term
equilibrium with respect to a market is not necessarily a
good thing from a normative perspective and making
that value judgment could be a misstep
 Markets can be in equilibrium, but it may not mean that
all is well. For example, the food markets in Ireland
were at equilibrium during the great potato famine in  PAUL
the mid-1800s. Higher profits from selling to the SAMUELSON
British made it so the Irish and British market was at an
equilibrium price that was higher than what consumers
could pay, and consequently many people starved.
• As we can see in diagram in the left, the
market equilibrium occurs when the supply
curve intersect with the demand curve
• As result, the equilibrium occurs when the
price of the product is RM 30 and the
quantity of the product is 1000.
• There will be no excess of demand and
supply at RM 30.

• In the case of excess supply, sellers will be

left holding excess stocks, and price will
adjust downwards and supply will be
reduced

• In the case of excess demand, sellers will

quickly run down their stocks, which will
trigger a rise in price and increased supply.
The more efficiently the market works, the
quicker it will readjust to create a stable
• An increase in supply will cause a reduction in the
equilibrium price and an increase in the equilibrium
quantity of a good
• The increase in supply creates an excess supply at
the initial price
S
• Excess supply causes the price to fall and quantity
demanded to increase U
P
P
L
• An decrease in supply will cause an increase in the Y
equilibrium price and a decrease in the equilibrium
quantity of a good
• The decrease in supply creates an excess demand at
the initial price.
• Excess demand causes the price to rise and quantity
demanded to decrease
• An increase in demand will cause an increase in
the equilibrium price and quantity of a good
• The increase in demand causes excess demand
to develop at the initial price
• Excess demand will cause the price to rise, and as D
price rises producers are willing to sell more, E
thereby increasing output.
M
A
N
D
• A decrease in demand will cause a reduction in
the equilibrium price and quantity of a good.
• The decrease in demand causes excess supply to
develop at the initial price.
• Excess supply will cause price to fall, and as price
falls producers are willing to supply less of the
good, thereby decreasing output.
CHANGES IN EQUILIBRIUM
• When both supply and demand change at the
same time, the impact on equilibrium price and
quantity cannot be determined for certain without
knowing which changed by a greater amount.

• Generally, the market situation is more complex

than the above-mentioned cases. That means,
generally, supply and demand do not change in an
individual manner. There is a simultaneous change
in both entities. This gives birth to four cases:
• Both demand and supply decrease
• Both demand and supply increase
• Demand decreases but supply increases
• Demand increases but supply decreases

#BOTHCURVESMO
VES
 CHANGES IN EQUILIBRIUM
BOTH SUPPLY AND DEMAND CHANGES DEMAND AND SUPPLY CHANGE NOT IN
IN THE SAME DIRECTION THE SAME DIRECTION
THAN
K YOU