Price Mechanism & Market equilibrium: Demand and Supply

Price Mechanism & Market equilibrium: demand and supply

Market equilibrium

A market is in equilibrium where market demand equals market supply.

At the equilibrium market price the quantity consumers wish to buy is exactly equal to the quantity producers wish to sell.

Market equilibrium

Market Disequilibrium

A market is in disequilibrium if the quantity consumers wish to buy is not matched by the quantity producers wish to sell.

At price P1 there is an excess supply. Price will need to fall to persuade consumers to buy more and for producers to contract their supply.

At price P2 there is an excess demand. Price will need to rise to reduce consumer demand and to encourage producers to supply more.

Market disequilibrium

Changes in the market price and market quantity.

Due to shifts in demand and supply curves the market price/ equilibrium price and market quantity/ equilibrium quantity can change.

Scenario 1: An increase in demand

 

demand increases

An outward shift of the demand curve from D to D1 will cause the equilibrium price to increase from P to P1 and the equilibrium quantity to increase from Q to Q1.

Scenario 2: A decrease in supply

 

supply decreases

An inward shift of the supply curve form S to S1 will cause the equilibrium price to increase from P to P1 and the equilibrium quantity to decrease from Q to Q1.

Scenario 3: Decrease in demand

 

A decrease in market price

An inward shift of the demand curve from D to D1 will cause the equilibrium price to decrease from P to P1 and the equilibrium quantity to decrease from Q to Q1.

Scenario 4: Increase in Supply

 

increase in supply

An outward shift of the supply curve from S to S1 will cause the equilibrium price to decrease from P to P1 and the equilibrium quantity to increase from Q to Q1.

Leave a Reply

Your email address will not be published. Required fields are marked *