Question

1. Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.

Answer 1

Market Equilibrium : Equilibrium means balance or equal. That is, there is no tendency to move in either direction. Equilibrium is defined as a situation in which the objectives of all firms ( profit ) and consumers ( prefernces ) are satisfied and the market is cleared. At equilibrium point, the quantity of good sold by all the firms and the quantity of goods bought by all the consumers are equal, ie; market demand will be equal to market supply at equilibrium. The price at which demand and supply are equal is known as equilibrium price. The quantity demanded and supplied will be equal at the equilibrium price. When the price is very high the buyers are not willing to buy. When the price is low producers are not willing to willing to sell. The quantity of goods sold and bought at equilibrium price is known as equilibrium quantity. The situation in which market demand is higher than the market supply is known at a given price is known as Excess Demand. The situation in which supply is higher than market demand at a given price is called Excess Supply.

Forces that move a market towards the equilibrium

Equilibrium price is one at which the quantity supplied and demanded are equal. So, when there is shift in supply or shift in demand new equilibrium emerges in price and quantity.

Shift in demand : Demand curve shift due to changes in non-price factors like consumers income, prices of other commodities and taste and preferences of the consumers. When the market demand curve shifts righwards and supply remains same, equilibrium price and equilibrium quanity increases. When demand curve shifts leftward and supply remains the same, the equilibrium price and quantity decreases.

Shift in supply : Market supply curve shifts due to the changes in non price factors like price of inputs, technology, unit tax etc. When market supply shifts rightwards and demand remains the same, equilibrium price decreases and equilibrium quantity increases. When market supply shifts leftward and the demand remains the same equilibrium price increases and equilibrium quantity decreases.