Question

Explain what the equilibrium market bundle is and describe how it is determined

Answer 1

The equilibrium bundle is determined at a point where the demand and supply of a product are equal. That is what is supplied is demanded in the market. If demand equals supply we say the market is in equilibrium. Any excess demand will lead to increase in price to the extent that demand reduces and becomes equal to the supply. Similarly if there is excess supply in the market the sellers would reduce the price to clear the unsold stocks. The price would fall and the excess supply will be removed. The market adjusting mechanism will always lead to equality between the demand and supply. The quantity at which demand equals supply is the equilibrium quantity and the price is known as equilibrium price.

In case of an individual firm, the equilibrium bundle is determined from the intersection MR and MC curves. Though this may differ under different market structures. In perfectly competitive market the equilibrium quantity is determined by the intersection of price and marginal revenue curves (P=AR=MR=MC). in monopoly and monopolistic competitive firm the quantity is determined at the intersection marginal revenue (MR) and marginal cost (MC) curves