MARKET EQUILIBRIUM

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 What determines market price?
• Classical economists: cost of production
determines market price.
• Utilitarians thought that demand determined
market price.
• Marshall pointed out that both D and S are
needed to determine market price.
• D and S are like two blades of a pair of
scissors, both are needed to cut material.

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 Market
• Market is where willing buyers meet willing
sellers, for exchange of goods and services.
• Could be local, national or international markets.
• Refers to Perfect Competition, or a Free Market,
without Government controls.
• Both buyers and sellers agree to the market price.
• At equilibrium, Qd = Qs.
• The market is cleared, i.e. at the given price there
is no surplus of supply, or unsatisfied demand, or
shortages.

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 Market Equilibrium
• Supply and demand are opposing forces.
• When P increases D decreases, but S
increases.
• When P decreases D increases, but S
decreases.
• But there could be one price at which D = S.
• This is the point of Market Equilibrium.
• With Equilibrium P and Equilibrium Q.
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 Market Equilibrium
* At P = Re.1, Qd = 10 Kgs, Qs = 2
P (Rs) Qd Qs Kgs. Deficiency of S.
Since D > S, sellers increase P.
(Kgs) (Kgs) When P D falls, but S increases.
This goes on till P = Rs.3.
1 10 2 At this point Qd=Qs = 6 Kgs. This
is Equilibrium Price.
2 8 4 * At a higher price, Rs.5, Qd=2 Kgs,
but Qs=10 Kgs. Surplus S.
As S > D, P falls.
3 6 6 As P falls, Qd increases, and Qs
decreases.
This goes on till the Equilibrium
4 4 8 P Rs.3 is reached.
*Equilibrium quantity = Qd = Qs = 6
5 2 10 Kgs.
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 Market Equilibrium
D D < S, S
Rs
surplus, P
d =2 s =10
P=5

E
P=3

P=1 s=2 d =10

D > S,
deficit, P
S
D
0
Qd=Qs=6 Qx

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 Stability, Uniqueness and Existence of
Market Equilibrium

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 Stable Equilibrium
• Stable Equilibrium: when any disturbance to the
equilibrium generates forces that bring the
system back to the original position.
• In certain situations, the price and Q do not
return to the original position.
• This is called Unstable Equilibrium.
• This occurs when D or S curves do not have their
characteristic shapes,
• Then P and Q will move progressively away from
the original equilibrium.

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