The Principle of Market Equilibrium
The Principle of Market Equilibrium is the proposition that markets always move toward equilibrium, a situation in which no opportunities for individuals to better off themselves remains. Specifically, a properly competitive market reaches equilibrium when a good or service has an equilibrium price tag, at which level the quantity demanded and supplied are balanced (called equilibrium quantity). In an economic graph, Market Equilibrium is illustrated by the cross of the demand and supply curves. When the supply curve and/or the demand curve is shifted due to some non-price determinants, there will be a surplus or shortage in the competitive market, causing the market price to be improperly high or low. In such cases, the competitive market will adjust until the price of the particular good or service settles at the equilibrium level and no sellers or buyers can prosper by taking a different action. The principle is illustrated by the case of varying rice price in Hau Giang and Can Tho, where a fall in demand and a fall in supply has resulted in a fall in the equilibrium price. There is an appreciable decrease in demand for rice because domestic consumption is slowing down because of rains, while the demand of importing countries is weakening. For that matter, rice warehouses hesitate to buy more rice, unless the purchasing price falls. These non-price determinants have shifted the demand curve leftward, showing that the rice market does follow the rule: the smaller demand for rice, the more the price will drop. To make it simpler, we have assumed that the supply curve stays constant. However, in fact, the competitive market environment is always changing, leading to the shifts of both the supply the demand curves. There is a decrease in the supply of rice not only because of the fall in price but also as a...