3.3 Market Equilibrium
You are now going to see how the interaction of buyers and sellers determines a market price, and how the price coordinates buying and selling plans. Explain ItIn an equilibrium, opposing forces are in balance. In a market, the opposing forces are demand and supply. Market equilibrium
Market equilibrium At the equilibrium price
Equilibrium price The equilibrium quantity
Equilibrium quantity
Graph It
Explain It When a market is not in equilibrium, there is either a surplus-the quantity supplied exceeds the quantity demanded-or a shortage-- the quantity demanded exceeds the quantity supplied. And when there is a surplus or a shortage, the law of market forces goes to work. When there is a surplus of a good, its price falls; and when there is a shortage of a good, its price rises. Why does the price fall when there is a surplus and rise when there is a shortage? When there is a surplus When there is a surplus, suppliers cannot sell the quantity they planned to sell. So, to sell more, they must accept a lower price. Buyers like the lower price. As the price falls, the quantity demanded increases, the quantity supplied decreases, and the surplus is eliminated. When there is a shortage When there is a shortage, buyers cannot get the quantity they planned to buy. So, to buy more, they must pay a higher price. Sellers like the higher price. As the price rises, the quantity demanded decreases, the quantity supplied increases, and the shortage is eliminated. The price stops rising when market equilibrium is restored.
Graph It Build this graph to illustrate the law of market forces at work.
Explore It Use the slider in this graph to explore the shortages and surpluses that arise when the price is above or below equilibrium.
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