What is Equilibrium?

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Equilibrium is where the products or services demanded in a market is equivalent to the products or services that are supplied in the market. Consumers are willing to buy the same value of goods or services that suppliers are willing to provide to the market at that current price

Equilibrium is the state in which the market supply and demand balance each other out, as a result, prices will be stable. If there is an over-supply of goods or services, prices will usually go down, allowing the demand to increase. The balancing effect of supply and demand results in a state of equilibrium.

Illustration of price and quantity equilibrium

What Does Economic Equilibrium Mean?

Economists use equilibrium to explain market behavior. Buyers and sellers will continue to buy and sell goods and services. At some point, the market price will be set to where the supply and demand in that market equal to each other. This is something that will naturally happen during the business life cycle.

More customers will want more of the products, this will increase the price of the product because there is a higher demand for that product. Manufacturers will then make more products and sell more of the products to meet the market’s demand. This, in turn, will decrease the price of the product, and a new equilibrium will take effect at the new market quantity and price.

Achieving equilibrium in real life is very challenging. The same interactions between the supply and demand of a product can, however, occur. In a case like a natural disaster where people would need food and the food available could be scarce. If there is no food or less food available, the price of food will rise.

Equilibrium vs. Disequilibrium

Markets can be in equilibrium or disequilibrium. Disequilibrium happens very quickly, or it can be a characteristic of a market. Disequilibrium can be a spillover from a different market.

For example, if there aren’t enough companies that can produce tea internationally, then the supply for the international regions will reduce, affecting the equilibrium in the tea market. Most economists believe that the labor market is in a state of disequilibrium due to legislation and the way that the public policy protects employees and their jobs.

Market equilibrium

Market equilibrium is the level of products and services in the market at which the demand and price of the product or service are the same. At market equilibrium, the customers will buy the exact quantities of goods and services that are supplied by the manufactures. Both parties will agree with regards to the price of the product. The market will always tend back to the agreed price and quantity after any disturbances happen in the market.

Market equilibrium on a graph will be the point where the supply and the demand curve intersect. The price and quantity at that point are known as the equilibrium price and equilibrium quantity. If the price rises above the equilibrium price, then the number supplied will not match the amount that is demanded. This will force the market to push the price back down to the state of equilibrium. It is important to note that the point of equality is not static; it can change.

Equilibrium Examples

Example 1

Equilibrium will incur in a market only if different customers and different suppliers are selling identical products. Let’s consider the demand for rulers.

Rulers are a nondescript item that can be bought or sold by numerous customers and suppliers. This market could be close to a real-world example of a market that functions in equilibrium. The market will be balanced by the equilibrium price of the ruler, the demand and supply will be restored. There is no reason for a client to pay more for a ruler that is identical to any other ruler. There will be no reason for a supplier to make changes to the product if it means that they will have fewer units at the equilibrium price.

Example 2

A company manufactures 1000 springs and sells them for $10 per spring; there is, however, no market for them; no one is interested in buying them at that price. The company decides to drop the price to $8 per spring. 250 New customers immediately buy the springs at this price. The company decides to lower the cost even more to $2 per spring, which encouraged 1000 buyers to purchase the product.

The product is now in a state of equilibrium where the company manufactures 1000 springs, and the demand for those springs is 1000.

Equilibrium Conclusion

  • Equilibrium is a situation where the products or services demanded in a market are equal to the products or services that are supplied in the market.
  • Economists use equilibrium to explain market behavior.
  • Markets can be in equilibrium or disequilibrium
  • At market equilibrium, the customers will buy the exact quantities of goods and services that are supplied by the manufactures