Market Equilibrium and Price Determination

Market Equilibrium: State of a market that has no tendency to change
Equilibrium Price: Price a which $Q_{s u ppl i e d} = Q_{d e man d e d}$
There is no surplus or shortage in a market equilibrium
There is no pressure to change price
The market clears, i.e., supply = demand
Market Price: Actual price the consumer pays for a good/service at any point in time

$S h or t a g e : Q_{d e man d e d} > Q_{s u ppl i e d}$

$S u r pl u s : Q_{s u ppl i e d} > Q_{d e man d e d}$

$Eq u i l ib r i u m_{M a r k e t} : Q_{s u ppl i e d} = Q_{d e man d e d}$

Mention whether shortage or surplus occurs at the original price, $P_{0}$
Mention the effect a shortage or surplus has on price
1. “Shortage creates an upward pressure on price”
2. “Surplus creates a downward pressure on price”
Mention how consumers react to shortage/surplus and the effect a change on price has in quantity demanded
1. In a shortage, consumers offer more for their wants (demand increases), while producers notice this (supply increases) and increase their prices. This decreases quantity demanded and increases quantity supplied
2. In a surplus, consumers offer less for their wants (demand decreases), while producers notice this (supply decreases) and decrease their prices. This increases quantity demanded and decreases quantity supplied
Mention how shortage/surplus will be eliminated
1. Quantity demanded will continue to decrease and quantity supplied will continue to increase until the shortage is eliminated
2. Quantity demanded will continue to increase and quantity supplied will continue to decrease until the surplus is eliminated
Mention the final equilibrium point and final effect on equilibrium price and quantity
1. Final equilibrium point is at $E_{2}$ . Price has increased from $P_{0}$ to $P_{1}$ and quantity has increased from $Q_{0}$ to $P_{1}$
2. Final equilibrium point is at $E_{2}$ . Price has decreased from $P_{0}$ to $P_{1}$ and quantity has decreased from $Q_{0}$ to $P_{1}$

Changes in Equilibrium