Equilibrium in the market is attained when the quantity offered by the suppliers equals the quantity demanded by the buyers. We define equilibrium as the price at which quantity demanded equals quantity supplied. Graphically, this is the point of intersection of the demand and the supply curve. This is shown in the figure below.
P S
P1
P0 E
P2
D
Q1d Q0 Q1s Q2d Q
In the above figure the demand and the supply curve intersects at the point E. This is the equilibrium point. The equilibrium price is P0 and the equilibrium quantity is Q0. At a price higher than this market clearing price P0 the quantity supplied is higher than the quantity demanded. An excess supply condition arises. We can see this at price P1 the quantity supplied Q1s is higher than the quantity demanded Q1d. So the price falls. At a price lower than P0, say P2, the quantity demanded Q2d is higher than the quantity supplied. So, there is an excess demand situation, The price goes up until it reaches the equilibrium point.
The equilibrium point can also be derived mathematically. Suppose the demand function is given as:
Qd = 20 – 3P
The supply function is given as:
Qs = 5 + 2P
We can obtain the equilibrium price by equating Qd with Qs:
20 – 3P = 5 + 2P
Or, 5P = 15
Or P = 3
At price 3 units, the demand equals supply. This is the equilibrium price. We can obtain the equilibrium quantity by substituting the value of P in the demand or the supply equation:
Qd =20 -3P = 20 – 3*3 = 20 – 9 = 11units.
Thus the equilibrium price is 3 units and the equilibrium quantity is 11 units.
Works Cited
Koutsoyiannis, A. (2003). Microeconomics. Pulgrave Macmillan.
