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.

In an equilibrium, opposing forces are in balance.

In a market, the opposing forces are demand and supply.

Market equilibrium Market equilibrium
When the quantity demanded equals the quantity supplied-buyers' and sellers' plans are in balance. occurs when the quantity demanded equals the quantity supplied-when buyers' and sellers' plans are in balance.

At the equilibrium price Equilibrium price
The price at which the quantity demanded equals the quantity supplied. , the quantity demanded equals the quantity supplied.

The equilibrium quantity Equilibrium quantity
The quantity bought and sold at the equilibrium price. is the quantity bought and sold at the equilibrium price.

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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.

The law of market forces Law of market forces
When there is a surplus, the price falls; and when there is a shortage, the price rises. states

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.

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Use the slider in this graph to explore the shortages and surpluses that arise when the price is above or below equilibrium.