Market Equilibrium
Market equilibrium
Decide whether a market has excess demand or supply at a price.
A market is in equilibrium when the plans of all buyers and all sellers match: market demand = market supply.
The price at which this happens is the equilibrium price, p∗, and the quantity bought and sold is the equilibrium quantity, q∗. In symbols: qD(p∗) = qS(p∗).
At any other price, plans do not match:
- Excess demand: at the price, buyers want more than sellers offer. Example: at ₹30, demand is 200 and supply is 160, an excess demand of 40.
- Excess supply: sellers offer more than buyers want.
Equilibrium is the price at which there is zero excess demand and zero excess supply.
How does the market get there? Since Adam Smith, economists have spoken of an 'invisible hand': under excess demand, buyers compete and the price rises; under excess supply, sellers compete and the price falls. The price keeps moving until the market clears.
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