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Equilibrium, Excess Demand, and Supply

Last updated date: 23rd May 2024
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In order to keep a market going, both consumers and manufacturers should be on the same page and come up with a convenient price range. When that part is done, the market goes through more demands of certain products and requires enough supply to keep the balance. This way, a market manages to be in equilibrium, and both customers and enterprises achieve contentment. 

While consumers focus on getting their desired products at an affordable rate, manufacturers focus on achieving a maximum amount of profits. The focus should be to find the balance so that there is no excess demand and excess supply to affect the equilibrium graph.

Following the curve of demand and supply, a price gets shifted by the market forces to its equilibrium level, and there can be two possibilities for that, excess demand or excess supply.

Excess Demand and Excess Supply

According to the market equilibrium formula, both demand and supply should be on an equal level. When the price gets lower than its equilibrium price, excess demand occurs, and the quantity received from manufacturers are lower than what consumers have demanded. 

On the other hand, Excess supply is the kind of situation where a price is more than its equilibrium price. This situation occurs when the manufacturers or suppliers impose an excess quantity of products than the quantity expected from them. 

Here is a chart to explain an excess demand and supply condition of a market.

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In order to keep the balance, market forces focus on driving the prices to its equilibrium level. In the case of higher supply, manufacturers will have to make more products and that the competition also increases for that. More suppliers will be eager to make those same products and sell them at a lower cost, resulting in achieving limited market revenue. 

When excess demand occurs, a market automatically suffers from a shortage of products, which adds extra pressure on the price since more consumers will be interested in buying those same goods. An increase in price helps the suppliers to produce more in order to fulfil the demand, and that eventually drives both quantity and price to its equilibrium level.

Market Equilibrium Represented Under Perfect Competition

The concept of market equilibrium refers to keeping a balance between market supply and market demand. When this balance is achieved, the quantity of goods is called equilibrium quantity and similarly the price is referred to as equilibrium price. 

Considering the market equilibrium graph, a market demand curve moves downwards because of the excessive demand. On the other hand, a market supply curve goes to upwards direction because of excessive supply. Both the market demand curve and the market supply curve are supposed to intersect with each other to attain that balance. The point where these two intersect is called the point of equilibrium.

Although a perfect competition price is always set by the industry and nobody from the consumer’s or the manufacturer’s side can alter that price. Market equilibrium depends on the requirements of both these parties and things related to this gets shifted accordingly. 

FAQs on Equilibrium, Excess Demand, and Supply

1. What is the Concept of Market Equilibrium?

Ans. Market equilibrium refers to the situation where the supply of a specific product is equal to its demand. This is the kind of balance that is required to keep the market going, and it is in balance, there will be no change in prices. The term ‘market-clearing price’ will be achieved through this. 

The concept of price mechanism works when both supply and demand go at the same level and how both of these interact to set the market cost and several products sold. Although, planned demand will not necessarily be in sync with planned supply as there can be a shortage or surplus to cause disequilibrium. 

2. How Does this Equilibrium Resist Any Change?

Ans. Looking at any price that is above the equilibrium price, it can be easily understood how the manufacturers focus on supplying more to achieve profits. That gives rise to a situation where there are excess supply and strain among all those sellers. That would force them to sell that surplus by lowering the price to its equilibrium price.

When the opposite thing happens, i.e., any price goes under its equilibrium price, more consumers get interested in buying products at that price range. This situation automatically gives rise to excess demand, and slowly consumers start paying an extra amount to fulfil their requirements. And, this situation again sends the price upwards; to its equilibrium level.

3. What Happens When there is a Shift in Demand and Supply? 

Ans. The balance called market equilibrium is achieved when both demand and supply are on the same level. If there is any change in any of these two, market equilibrium automatically loses its balance. There can be reasons for a shift in demand such as alteration of the price of substitute goods, population, income, more expectation regarding the change of price, tastes and preferences of consumers, etc. 

On the other hand, a shift in supply happens due to alteration of taxation policy, prices of other goods, future goals of the firm, etc. Whenever there is a shift in any of these, the balance gets affected. In the case of demand, competition among buyers increases and in the case of supply, competition among sellers increases. Necessary actions are required to be taken to bring them at their equilibrium level.