EQUILIBRIUM

In studying equilibrium, our objective is to determine the market price and quantity and

try to identify the forces that influence such a price and quantity.

 Equilibrium can be defined as a state of rest. It is a situation whereby quantity

demanded Qd  is equal to quantity supplied Qs  i.e. Qd  Qs

 In this case, we say that the market is clearing and there are no economic forces

generated to change this point hence it is stable.

We determine this graphically by the interpretation point of the demand and supply

curves as below

Price

Excess supply S

––7––8

1

Equilibrium price = pe

pe E

Equilibrium Quantity = Qe

1–

Exces

2

s demand

–3

D

0 Q3Q1

Quantity

Qe Q2 Q4

In the above diagram it can be seen that the forces of demand and supply determine the

price in the market, i.e. a price at which both consumers and sellers are happy and where

quantity supplied equals quantity demanded. That price is known as the equilibrium

price.

 In the diagram, should the price be above the equilibrium price, forces of demand and

supply will work together and lower the price towards the equilibrium price until the

equilibrium price is reached. For example at p1 consumers will only be willing to

buy 0Q1 from the market while sellers will by willing to supply 0Q2 . In this case an

excess supply equals to Q1Q2 will be created. Because of this excess supply, sellers

will have to reduce the price in an attempt to encourage consumers to buy more.