ECO / 561
Market Equilibration Process
Market Equilibrium occurs when the quantity supplied is equal to quantity demanded. The price equilibrium price exists when buyers and sellers price match and there is no governmental intervention (perfectly competitive market). After a market is in equilibrium, there is no trend for the market price to alter.
For example, the law of demand states that as price goes up the quantity demand must go down and similarly, law of supply states price goes up quantity supply must go up (McConnel, Brue, & Flynn, 2009). Viewing the graph below we can find the equilibrium occur at the price of $3 where the quantity demanded equals the quantity supply at three units. The price is stable at $3 and at any other prices will have a |Price (P) |Quantity Demanded (Qd) |Quantity Supplied (Qs) | |$1 |5 |1 | |$2 |4 |2 | |$3 |3 |3 | |$4 |2 |4 | |$5 |1 |5 |
Equilibrium occurs at P=$3 (Qs = Qd = 3 units) [pic]
a tendency to change.
At a dollor, for example, at $1 buyers are able to buy five units but seller are only willing to provide one unit to the market. In this situation, quanitity damand is greater than qualiity supply is referred to as a shortage and will result in an upward pressure in price. Since there is only one unit is available so buyers will complete to buy the one available unit by offering more money. Then price goes up and the qualitity demand decreases, quantity supply rises until equilibrium is reached (McConnel, Brue, & Flynn,...