MARKET EQUILIBRIUM
Market Equilibrium
It is a situation of the market in which demand for a commodity is exactly equal to its supply. Market equilibrium is defined
as a state of the market when demand for a commodity is equal to its supply, corresponding to a particular price.
Equilibrium Price:
The market supply equals the market demand. The cost price at which equilibrium is reached is known as the equilibrium price,
and the quantity purchased and sold at this cost price is known as the equilibrium quantity.
Equilibrium Quantity:
Equilibrium Quantity the term equilibrium quantity alludes to the number of goods provided in the marketplace when the amount
provided by vendors precisely coordinates with the amount demanded by purchasers. It is an idea inside the branch of knowledge
of market equilibrium or market balance and is identified with the idea of equilibrium price.
Excess Demand:
When the amount wanted exceeds, the quantity supplied at the current price level, the market is said to be in excess demand.
Yd > Ys
Here, Yd = Market Demand
Ys = Market supply
Excess Supply:
If at any price market supply is greater than market demand. it is said excess supply in the market.
Ys > Yd
Here, Yd = Market Demand
Ys = Market supply
Simultaneous Change In Demand & Supply And Market Equilibrium
Simultaneous Increase In Demand and Supply
A. Increase in Demand > Increase in Supply
D is the initial demand curve and S, is the initial supply curve. E is the point of initial equilibrium. OP, is the
equilibrium price and OQ, is the equilibrium quantity Due to an increase in demand, D, is the new demand e
Due to an increase in supply, S is the new supply curve.
B. Increase in Demand = Increase in Supply:
Shows increase in demand is equal to an increase in supply. There is no excess demand or excess supply. Accordingly, the equilibrium
price remains unchanged, i.e., OP. However, equilibrium quantity increases from OQ to OQ1. This is because both demand and
supply have increased.
Increase in Demand< Increase in Supply
D is the initial demand curve and, is the initial supply Curve. E is the point of initial equilibrium. OP is the equilibrium price and is the
equilibrium quantity. Due to the increase in demand, D is the new demand curve. Due to the increase in supply, S is the new supply curve.
Simultaneous Decrease In Demand and Supply
Decrease in Demand = Decrease in Supply
When decrease in demand is proportionately equal to decrease in supply, then leftward shift in demand curve from D to D1 is
proportionately equal to leftward shift in supply curve from SS to S1S1. The new equilibrium is determined at E1 As demand
and supply decrease in the same proportion, equilibrium price remains same at OP, but equilibrium quantity falls from OQ to OQ1.
Decrease in Demand > Decrease in Supply
When decrease in demand is proportionately more than decrease in supply, then leftward shift in demand curve from D to D1
is proportionately more than leftward shift in supply curve from S to S1. The new equilibrium is determined at E1,
equilibrium price falls from OP to OP1 and equilibrium quantity falls from OQ to OQ1.
Decrease in Demand < Decrease in Supply
When decrease in demand is proportionately less than decrease in supply, then leftward shift in demand curve from D to D1
is proportionately less than leftward shift in supply curve from S to S1. The new equilibrium is determined at E¹ equilibrium
price rises from OP to OP1 whereas, equilibrium quantity falls from OQ to OQ1.
Price Ceiling & Price Floor
Price Ceiling:
Price ceiling means the maximum price of a commodity that the seller can charge from the buyers the government fixes this
price is much below the equilibrium market price of a commodity so that, it becomes within the reach of the poorer sections
of the society.
Price Floor:
It means the minimum price fixed by the government for a commodity in the market. It seems paradoxical.
Rationing:
Under rationing system, a certain part of demand of the consumers is met at a price lower than the equilibrium price. Under this
system, consumers are given ration coupons/ Cards to buy an essential commodities at a price lower than the equilibrium price
from Fair price/ Ration Shop.
Black market:
It is a market under which the commodity is bought and sold at a price higher than the maximum price fixed by the government.