Table of Content

Market Equilibrium Concept | Types of Market Equilibrium with example

Market Equilibrium:
Market equilibrium refers to a market in which the market price has reached the level at which the quantity demanded is equal to the quantity supplied. In other words, Market equilibrium is a situation in which the quantity demanded of a commodity is equal to the quantity supplied of the commodity. The equality between demand and supply gives an equilibrium price. It means that the equilibrium price is the price at which the quantity demanded is equal to the quantity supplied. Let us know about market equilibrium with the help of the Schedule and Figure.

Price

Demand

Supplied

Shortage (-)

Surplus (+)

Pressure

5

50

10

-40

Upward

10

40

20

-20

Upward

15

30

30

0

Equilibrium

20

20

40

20

Downward

25

10

50

40

Downward


In the given schedule, when the price of Raddish is Rs. 5, the demand for reddish is 50 units and the supply is 10 units. Similarly, When the price of Raddish increases by Rs. 10, the demand for reddish is decreased to 40 units, and the supply is increased to 20 quantities. But the price of Raddish is Rs. 15, and the demand and the supply are equal to each other. This is the point of equilibrium, where demand and supply are equal. At the equilibrium price of Rs. 15, sellers can sell the quantity which they offer for sales and the buyer is able to get the same commodity in the desired quantity. But at the other prices, the Raddish is in disequilibrium. At all prices above Rs. 15, supply exceeds demand. Samwise, At all prices below Rs. 15, demand exceeds supply. When supply exceeds demand, it is called surplus and excess supply. On another side, When demand exceeds supply, it is called shortage or excess demand.


In the given figure, X-axis represents the quantity of demand quantity supplied. Y-axis represents the price of the commodity. DD and SS represent the demand curve and Supply curve respectively. These two curves are intersecting each other at point E, which is called the equilibrium point because in the equilibrium point demand and supply are equal to each other. Hence, the equilibrium price is rs. 15 and the equilibrium of output is 30 units. When the price exceeds the equilibrium price rs. 15, quantity supplied exceeds quantity demanded. This is known as excess supply or surplus. Let's suppuose, when the price increases to Rs. 20, the quantity demanded decreases to 20 units, and the quantity supplied increases by 40 units. In this situation, there is an excess supply equal to 20. Similarly, When the price decrease or is below the equilibrium price of Rs. 15, the quantity demanded exceeds the quantity supplied. Let's suppose, when the price decrease to Rs. 10, the quantity demanded an increase to 40 units, and the quantity supplied decreased by 20 units. In this situation, there is an excess demand equal to 20 units. It will force prices to rise at the equilibrium if there is excess demand or shortage. Similarly, It will force prices to fall at the equilibrium if there is excess supply or surplus. 

Change in Market Equilibrium:
 Market prices are determined by the interaction between demand and supply in the competitive market change in market prices are due to the changing demand or change in the supply curve or both. There are three causes of change in equilibrium which are as follows:
1. Effect of Shift in Demand Curve/ Change in Demand:
    a. Rightward Shift in Demand Curve:
    b. Leftward Shift in Demand Curve:

2. Effect of Shift in Supply Curve/ Change in Supply:
    a. Rightward Shift in Supply Curve:
    b. Leftward Shift in Supply Curve:

3. Effect of Shift in Both Demand and Supply Curves:

1. Effect of Shift in Demand Curve: When the demand curve shift, there is a change in the original equilibrium price and quantity. There are two types of shifts in the demand curve; a. Rightward shift in the demand curve, b. A leftward shift in the demand curve. If price and quantity increase, the demand curve shifts rightward and the supply curve remains the same or constant. On another hand, If price and quantity decrease, the demand curve shifts leftward and the supply curve remains constant.
a. Rightward Shift in Demand Curve:  If price and quantity increase, the demand curve shifts rightward. If the demand curve shifts towards the right remaining the supply curve constant, there will be an increase in both equilibrium price and quantity.


In the given figure, X-axis represents the quantity of demand and supply, and Y-axis represents the price of the commodity. The initial demand curve and the initial supply curve are given by the DD and SS curve. The initial demand curve DD and the initial supply curve SS are intersecting each other at point E, which is called the market equilibrium point. Hence, the initial equilibrium price is OP and the initial equilibrium quantity is OQ. Let's think, the initial demand curve shifts rightward from DD to D1D1, Supply curve remains the same and constant. When the initial demand curve shifts toward the right it creates a new equilibrium point from E to E1. Consequently, both the equilibrium price and quantity of output increase. OP1 is the new equilibrium price and OQ1 is the new equilibrium quantity.

b. Leftward Shift in Demand Curve: If price and quantity decrease, the demand curve shifts leftward. If the demand curve shifts towards the left remaining the supply curve constant, there will be a decrease in both equilibrium price and quantity.


In the given figure, X-axis represents the quantity of demand and supply, and Y-axis represents the price of the commodity. The initial demand curve and the initial supply curve are given by the DD and SS curve. The initial demand curve DD and the initial supply curve SS are intersecting each other at point E, which is called the market equilibrium point. Hence, the initial equilibrium price is OP, and the initial equilibrium quantity is OQ. Let's think, the initial demand curve shifts leftward from DD to D1D1, Supply curve remains the same and constant. When the initial demand curve shifts toward the leftward, it creates a new equilibrium point from E to E1. Consequently, both the equilibrium price and quantity of output decrease. The new equilibrium price is OP1 and the new equilibrium quantity is OQ1.

2. Effect of Shift in Supply Curve: When the supply curve shift, there is a change in the original equilibrium price and quantity. There are two types of shifts in the supply curve; a. Rightward shift in the supply curve, b. a leftward shift in the supply curve. When the equilibrium price fall and quantity rises, the supply curve shifts rightward and the curve remains the same or constant. On another hand, when the equilibrium price rise and quantity falls, the supply curve shifts leftward and the demand curve remains constant.

a. Rightward Shift in Supply curve: When the equilibrium price decrease and equilibrium quantity increase, the supply curve shifts rightward. In other words, If the supply curve shifts towards the right remaining the demand curve constant, there will be an increase in equilibrium quantity and a decrease in equilibrium price.


In the given figure, X-axis represents the quantity of demand and supply, and Y-axis represents the price of the commodity. The initial demand curve and the initial supply curve are given by the DD and SS curve. The initial demand curve DD and the initial supply curve SS are intersecting each other at point E, which is called the market equilibrium point. Hence, the initial equilibrium price is OP and the initial equilibrium quantity is OQ.  Let's suppose, the initial supply curve shifts rightward from SS to S1S1, remaining the demand curve constant. When the initial supply curve shifts toward the right it creates a new equilibrium point from E to E1. There is a decrease in the equilibrium price and an increase in the equilibrium quantity of output. OP1 is the new equilibrium price and OQ1 is the new equilibrium quantity.

b. Leftward Shift in Supply curve: When the equilibrium price increase and equilibrium quantity decrease, the supply curve shifts leftward. In other words, If the supply curve shifts towards the left remaining the demand curve constant, there will be a raise in equilibrium price and a fall in equilibrium quantity.


In the given figure, X-axis represents the quantity of demand and supply, and Y-axis represents the price of the commodity. The initial demand curve and the initial supply curve are given by the DD and SS curve. The initial demand curve DD and the initial supply curve SS are intersecting each other at point E, which is called the market equilibrium point. Hence, the initial equilibrium price is OP and the initial equilibrium quantity is OQ.  Let's suppose, the initial supply curve shifts leftward from SS to S1S1, remaining the demand curve constant. When the initial supply curve shifts toward the left it creates a new equilibrium point from E to E1. There is raise in the equilibrium price and a fall in the equilibrium quantity of output. OP1 is the new equilibrium price and OQ1 is the new equilibrium quantity.

3. Effect of Shift in Both Demand and Supply Curves: When the demand and supply curves change simultaneously, the equilibrium price and quantity will change. But it depends on the extent of change in the demand and supply curve. If the relative shifts in the demand and supply curves are parallel, the equilibrium price will remain the same but the quantity produced will change.
In the given figure, X-axis represents the quantity of demand and quantity supplied or Quantity of output, and Y-axis represents the price of the commodity. The initial demand curve and the initial supply curve are given by the DD and SS with the initial equilibrium point E. Both the initial demand curve (DD) and the initial supply curve (SS) are shifting toward the right simultaneously from DD to D1D1 and SS to S1S1. After shifting the initial demand curve (DD) and initial supply curve (SS), attained the new equilibrium point E1. The equilibrium price is constant at OP but the new equilibrium quantity is increasing from OQ to OQ1, it is due to an equal and parallel shift in the demand and supply curve.



In the given figure, X-axis represents the quantity of demand and quantity supplied or Quantity of output, and Y-axis represents the price of the commodity. The initial demand curve and the initial supply curve are given by the DD and SS with the initial equilibrium point E. Both the initial demand curve (DD) and the initial supply curve (SS) are shifting toward the right simultaneously from DD to D1D1 and SS to S1S1. After shifting the initial demand curve (DD) and initial supply curve (SS), attained the new equilibrium point E1. It shows an increase in equilibrium price and output due to the relatively greater shift in the demand curve and the lowest shift in the supply curve. The new equilibrium price is OP1 and the new equilibrium quantity of output is OQ1.



In the given figure, X-axis represents the quantity of demand and quantity supplied or Quantity of output, and Y-axis represents the price of the commodity. The initial demand curve and the initial supply curve are given by the DD and SS with the initial equilibrium point E. Both the initial demand curve (DD) and the initial supply curve (SS) are shifting toward the right simultaneously from DD to D1D1 and SS to S1S1. After shifting the initial demand curve (DD) and initial supply curve (SS), attained the new equilibrium point E1. It shows a decrease in equilibrium price but an increase in the equilibrium quantity of output due to the relatively greater shift in the supply curve and the lowest shift in the demand curve. The new equilibrium price is OP1 and the new equilibrium quantity of output is OQ1.

Preference: Microeconomics; Asmita Publication; BBS 1st year
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