Supply and Demand are considered the two main constituents of transaction in any market. While the former is referred to as the quantity of the commodities that the producer wants to sell, the latter refers to the quantity of the commodities that the consumers are willing to buy at a given point of time. Therefore, in economics, these two terms are always complementary to each other. And that brings us to our topic, Market Equilibrium. It is defined as the state in a market when the supply and demand of commodity reach equilibrium.
As stated above, the term market equilibrium is referred to a state in a market when the supply of an item becomes equal to the demand of the item. To elaborate, Market Equilibrium is an economic state where whatever item is being demanded, the supply of the item is adequate, or, the supply and demand are in a state of equilibrium.
As we have studied, an item’s supply is indelibly dependent on its demand. Ideally, if the demand exceeds the supply, then the supply is inadequate, whereas, if the supply surpasses the demand, then the item’s demand is low. So, a state of balance between the two is when market equilibrium is achieved.
Whenever there is an increase in the supply of an item or commodity, it is referred to as “a surplus”. In case of a surplus, the price at which the commodity or item is being sold would preferably decrease. This is because of surplus results in overproduction of an item which doesn’t have the adequate demand for the item. And as a result, the item will be put on sale by the producer of the item since lower prices result in higher demanded.
Likewise, whenever there is a decrease in the supply of a commodity, it is referred to as “a shortage” in the market. During a shortage, the quantity of the item’s demand outstrips the item’s supply. However, one key distinction between a surplus and a shortage is that during a surplus the reduction of price enables the market of the item to reach equilibrium, whereas, during a shortage, the market is not clear. Therefore, during a shortage, the market price of the item increases. For example, whenever we hear that the market price of potatoes has increased, it is due to the inadequate supply of potatoes in the market.
Since any economic transaction cannot be considered complete without the aspect of price in it, market equilibrium cannot be drawn without considering the price. By definition, the price corresponding to which a state of market equilibrium is achieved is called the equilibrium price or the market-clearing price. From its definition, market-clearing price is quite similar to money market equilibrium which is the equilibrium in the rate of interest between the supplied money and the demanded money.
Therefore, if we were to consider the scenarios of a surplus and a shortage in a market, the prices of the item that is facing a surplus or a shortage in the market; require to be adjusted accordingly to reach potential. Therefore, the equilibrium price of an item is subjected to change. For instance, if an item is being imported from one country to another, the supply of the item is increased which decreases the market-clearing price. Whereas, if the item is being exported from one country to another, the demand for the item increases, resulting in shortage and therefore, the equilibrium price gets increased.
When we plot a graph of an item’s price against its quantity, it is observed that as the price of the item begins to increase, the demand of the item decreases, whereas, when the price is at a minimum, the supply is at a high. Therefore, when the market equilibrium graph is plotted, two complementary curves of supply and demand intersect each other. This point is called marketing equilibrium. Therefore, it is evident that the concept of market equilibrium is heavily reliant on the factors of price and quantity of any particular item. The market equilibrium diagram below demonstrates this concept.
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The aspect of customer interest and perceptions often play an important role in determining market equilibrium.
If the market price for an item is too high, then customers often tend to look for alternatives or cease to use the item due to its high price.
The market prices of an item are often heavily reliant on the factors of competition in the market.
1. What are the Primary Causes of Changing the Price of an Item with Regards to its Demand and Supply?
Ans: From the graph of an item’s price against its quantity, it is evident that the aspects of demand and supply play an integral role while determining the price of an item. Since demand and supply are complementary to one another, when the demand for an item increases, its price and output automatically increase due to competition. Similarly, when the demand is decreased, the price and its output are decreased as well. And, when the supply of the item increases, its price gets reduced (surplus) while its output increases. However, when the item’s supply decreases, its price increases while its output is reduced.
2. What External Factors can be Considered Responsible for Changes in Equilibrium Prices?
Ans: There are several factors which can be considered responsible for changes in the equilibrium prices of an item. These factors are often linked to variations in the aspects of supply and demand. Some of these factors include the practices of higher costs of items which often result in changes among customer interests which provokes them to look for cheaper alternatives due to differences in income. Other factors include changes in the prices of raw materials of the item which occurs often as well as different government policies and technological variations regarding the item which often results in increasing the prices.