Whenever markets experience imbalances—creating disequilibrium prices, surpluses, and shortages—market forces drive prices toward equilibrium. A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus.
How does a market reach equilibrium?
A market is said to have reached equilibrium price when the supply of goods matches demand. A market in equilibrium demonstrates three characteristics: the behavior of agents is consistent, there are no incentives for agents to change behavior, and a dynamic process governs equilibrium outcome.
How do forces of demand and supply interact to attain equilibrium in the market?
For most products, as their price increases, the supply increases but the demand decreases. When the amount demanded equals the amount supplied, then market equilibrium (aka supply-demand equilibrium) is achieved, where the quantity equals the equilibrium quantity and the price equals the equilibrium price.
Why is it important to reach an equilibrium in the market?
Equilibrium occurs when the price is such that the quantity that consumers wish to buy is exactly balanced by the quantity that firms wish to supply, again there is no tendency for price to change. So, it is price that brings a market into equilibrium.
What causes changes in market equilibrium?
Changes in either demand or supply cause changes in market equilibrium. Similarly, the increase or decrease in supply, the demand curve remaining constant, would have an impact on equilibrium price and quantity. Both supply and demand for goods may change simultaneously causing a change in market equilibrium.
How does change in supply and demand affect equilibrium?
There is an inverse relationship between the supply and prices of goods and services when demand is unchanged. If there is an increase in supply for goods and services while demand remains the same, prices tend to fall to a lower equilibrium price and a higher equilibrium quantity of goods and services.
