Market Equilibrium

Study Notes

Market Equilibrium

Definition: Market equilibrium occurs when the supply and demand curves intersect, resulting in no excess supply or demand for a particular good or service.

Characteristics:

The quantity supplied equals the quantity demanded (Qs = Qd)
The market is in a state of rest, with no tendency for change
There is no excess supply or demand
The price and quantity traded are stable

How to Achieve Equilibrium:

Movement Along the Supply Curve: When the price changes, the quantity supplied changes, but the supply curve remains the same.
Movement Along the Demand Curve: When the price changes, the quantity demanded changes, but the demand curve remains the same.
Shifts in Supply and Demand Curves: Changes in external factors (e.g., technology, consumer preferences) cause the supply or demand curve to shift.

Types of Equilibrium:

Short-Run Equilibrium: Temporary equilibrium, where supply and demand curves intersect.
Long-Run Equilibrium: Permanent equilibrium, where the firm produces at minimum average cost.

Importance of Market Equilibrium:

Efficient Allocation of Resources: Equilibrium ensures that resources are allocated to their most valuable uses.
Price Stability: Equilibrium prices reflect the true value of the good or service.
Social Welfare: Equilibrium maximizes social welfare by allocating goods and services to those who value them most.

Market Equilibrium

Market equilibrium occurs when the supply and demand curves intersect, resulting in no excess supply or demand for a particular good or service.

Characteristics of Market Equilibrium

The quantity supplied equals the quantity demanded (Qs = Qd)
The market is in a state of rest, with no tendency for change
There is no excess supply or demand
The price and quantity traded are stable

Achieving Market Equilibrium

Movement Along the Supply Curve

When the price changes, the quantity supplied changes, but the supply curve remains the same

Movement Along the Demand Curve

When the price changes, the quantity demanded changes, but the demand curve remains the same

Shifts in Supply and Demand Curves

Changes in external factors (e.g., technology, consumer preferences) cause the supply or demand curve to shift

Types of Market Equilibrium

Short-Run Equilibrium: Temporary equilibrium, where supply and demand curves intersect
Long-Run Equilibrium: Permanent equilibrium, where the firm produces at minimum average cost

Importance of Market Equilibrium

Efficient Allocation of Resources: Equilibrium ensures that resources are allocated to their most valuable uses
Price Stability: Equilibrium prices reflect the true value of the good or service
Social Welfare: Equilibrium maximizes social welfare by allocating goods and services to those who value them most