What do you understand about the meaning of Market Equilibrium
Market equilibrium is a condition in which the quantity of a good or service supplied is equal to the quantity demanded, resulting in a stable price for that good or service. In other words, at the equilibrium price, the amount of the good that buyers are willing and able to purchase exactly matches the amount that sellers are willing and able to sell.
The concept can be illustrated with a supply and demand graph where the supply curve (upward sloping) intersects with the demand curve (downward sloping). The point of intersection represents the market equilibrium, indicating the equilibrium price and equilibrium quantity.
Key aspects of market equilibrium include:
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Equilibrium Price: The price at which the quantity demanded by consumers equals the quantity supplied by producers. At this price, there is no excess supply (surplus) or excess demand (shortage).
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Equilibrium Quantity: The quantity of goods or services that are bought and sold at the equilibrium price.
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Market Clearing: The condition in which the market is clear of any excess supply or demand, meaning that every buyer finds a seller, and every seller finds a buyer.
In practice, markets are often in a state of flux, with prices and quantities continually adjusting in response to changes in supply and demand factors. However, the concept of market equilibrium provides a fundamental framework for understanding how prices and quantities are determined in a competitive market.
When a market is not in equilibrium, forces of supply and demand will typically push it toward equilibrium. For instance:
- If there is a surplus (supply exceeds demand), producers might lower prices to increase sales.
- If there is a shortage (demand exceeds supply), consumers might bid up prices, encouraging producers to supply more.
These adjustments continue until the market reaches equilibrium, where supply equals demand.
