In the previous post, we will discuss what is demand and demand curve. We have also discussed what its supply and supply curve and what is the difference between quantity demanded or changing demand. And what is the difference between quantity supplied and change in supply metric?
In this post, we will discuss what happens when these demand and supply curves interact with each other. How the condition of equilibrium in the market arrives?
Before starting this equilibrium condition, I want you to make one assumption. And that assumption is there is no control of any government or any institution on the market. We are assuming free-market economic. Which means only buyers and sellers affect the economic. What do I mean by this? See in the market there are suppliers and there are consumers.
The prices and the quantity are decided by these suppliers and consumers. But in the real world that are governments that of institutions like a central bank who intervene in the market and change the equilibrium or the quantity and prices that were decided by the market.
That is the real world there is an influence of government and other institutions on prices and quantities. But for the study purpose for learning the purpose, we are assuming that the markets are free and the equilibrium price and equilibrium quantity are decided by the market players only.
condition of equilibrium in the market arrives:
In the graph, we have a supply curve upward sloping. And we have demand curve downward sloping. On the x-axis, we have quantity supplied as well as demanded. On the y-axis, we have prices. When the supply and demand curve intersect, the point at which the demand and supply curve intersects is called the equilibrium point and at the equilibrium point, you get equilibrium quantity and also you get equilibrium price.
equilibrium price an equilibrium quantity
What it’s means by equilibrium price an equilibrium quantity? We can see that at this price the consumers are willing to buy this much of quantity or we can also see that at this price the suppliers are willing to supply this much of quantity.
The demand is more than supply and above the equilibrium point, the supply is more than demand. Supply quantity is more than the demanded quantity. But you must know that equilibrium is a universal truth. The mismatch between demand and supply may be there for a moment or for a few times. But, sooner or later the market will come to equilibrium. That will be a certain quantity that consumers will buy and the producers will sell at a mutually acceptable price.
At equilibrium, both buyers and sellers accept the view in price. That’s why the equilibrium has reached and the quantity demanded equals the quantity supplied. This thing you should know this is the most important thing when it comes to solving the questions on demand and supply. You need to remember the quantity demanded equals quantity supplied and the equilibrium point. And the prices will always reflect the actual position of demand was a supply.
What happens if the demand is more than supply?
People will try to buy more. And if the suppliers see that people are demanding more, they will automatically increase their prices. And the supply and demand will reach an equilibrium level.
On the other hand, the quantity supplied is more than the quantity demanded. Suppliers have a lot of stock available with them and people are not buying the products. So, what will suppliers do? They will start selling at a lower price and hence the prices will come down. And again, the equilibrium condition will reach. That’s how the demand and supply interact with each other and eventually come to equilibrium.
There may be a momentary mismatch between supply and demand, but prices will be playing a key role in bringing the equilibrium. Prices lower than the equilibrium price and prices higher than the equilibrium price. In price lower than the equilibrium price there is a shortage. Why? Because the quantity supplied is less then the quantity demanded. And the price is more than the equilibrium price. There is a surplus because the quantity supplied is more than the quantity demanded. But the most important thing is whether there is a surplus in the market or a shortage in the market. The prices will change themselves to reach the equilibrium point. The price will adjust itself until the quantity demanded and quantity supplied is the same. And the market has reached equilibrium.
Change in equilibrium:
We will see some cases and we will see how supply and demand change the equilibrium.
Case 1: (equilibrium in the market)
If the production cost of a particular good decrease, anything that changes the supply other than the price shifts the supply curve. If the price of a commodity change there will be a movement along the supply curve. But if the factor other than the price changes and it affects the supply the supply curve will shift. If the production cost of a particular good decrease then it will shift the supply curve. What will happen? Supply will shift to the right because the cost of production has decreased. So producers will want to sell more at a given price. This is how equilibrium has changed.
Case-2: (equilibrium in the market)
On the x-axis you have quantity on y-axis you have the price and we also have an initial demand curve and supply curve. Now if the income of a person increases the demand curve will shift to the right. Because at this same price now that person will be able to buy more quantity of a particular good. So the demand curve has shifted to the right. The equilibrium point has also changed.
Case-3: (equilibrium in the market)
If we see both cases together. If the production cost of particular good decreases and at the same time the income of a person increases.
On the x-axis, we have shown quantity supplied as well as demanded. On the y-axis, we have indicated the prices. Now the initial demand curve is d an initial supply curve is s. The first condition is the production cost of the awful particular good has decreased. The supply curve will shift to the right. And at the same time, the income of a person has also increased which means the demand curve will also shift to the right. The equilibrium point has changed due to the change in supply and demand. This is how you decide how equilibrium will change if the demand or supply of a particular good change. And you should also know the corresponding quantity in prices q2 and p2 are new and this is due to is the new price.