Market Equilibrium
Categories: Econ
When the quantity of something being supplied is the same as the how much of that thing is being demanded, the market of that thing is in equilibrium.
Let's say you're trying to make a pie, but you're not sure what kind. Well, apple farmers are willing to produce 10 pounds of apples at $5/pound and people want 10 pounds of apples at that price; the market would be in equilbrium at the price of $5/pound.
Now let's look at the pumpkin market, where producers make 20 pounds of pumpkin for $10/pound, but buyers are only willing to get 5 pounds of pumpkins at that price, so the market is in disequilibrium...namely, a surplus, since suppliers are producing more pumpkin than is needed.
Producers are making 15 cartons of blueberries, which go for $1/carton, but at such a cheap price, consumers want 20 cartons. That means that there aren't enough cartons of blueberries to meet the quantity demanded, so the market's in disequilbrium, namely a shortage.
Now that you figured out the markets of all these fruits, we're going to make a pie to celebrate.
When we’re talking “market equilibrium,” we’re talking about the market for a specific good or service. Pick a thing...any thing. Market equilibrium happens when the quantity demanded of a thing equals the quantity supplied of that thing, at a given price. At market equilibrium, there’s no excess supply (which would mean cranky suppliers) and no excess demand (which would mean cranky consumers). At equilibrium, everybody’s...chill.
The reason economists gush over market equilibrium like a diehard Belieber at a J Beebs concert is because, well...it's kind of a magical force of its own, like the Mother Nature of capitalism. When the market is competitive, market equilibrium happens naturally. If you’ve ever heard of Adam Smith’s “Invisible Hand,” well...this is what he was talking about.
In a perfectly competitive market, where there are lots of equally-sized sellers selling, and no Amazons or Walmarts stomping all over the little guys, the invisible hand is what keeps surpluses and shortages from happening.
For example: the fake mustache market. Yes, there’s a market for that.
Where the mustache supply curve crosses with the mustache demand curve is where mustache equilibrium is at. Drop a plumbline down from equilibrium to see the equilibrium quantity of mustaches. Likewise, you can see the equilibrium price where the supply and demand curves cross on the left hand side of the graph.
In our perfectly competitive mustache market, the amount of mustaches sold and the price they’re sold at is capitalism’s invisible hand at work. When suppliers try to sell their fake mustaches at too high a price, consumers will think it’s a ripoff and go buy something else instead, leaving sellers with a surplus of fake mustaches.
Remember, the mustache market has many mustache suppliers, all competing against each other. Consumers will flock to the mustache supplier with the best prices; this keeps suppliers from holding the fake mustache market hostage. Many mustache suppliers competing for the dollars of mustache-buyers will naturally drive prices down if they’re too high.
The invisible hand smacks mustache suppliers upside the head, making suppliers realize they should drop their price if they wanna sell some mustaches, but they don’t want to make the price too low.
If suppliers drop the price of fake mustaches too low, there’ll be a mustache shortage. And, uh, we can’t have that. When there’s a shortage of mustaches, there’s an ugliness not even the best fake mustache could cover up. Consumers will be at each other’s throats, fighting over fake mustaches like it’s Black Friday.
When they’re all sold out, consumers will be demanding more...it’s just too good of a deal.
In the case of a mustache shortage, the invisible hand will be smacking mustache suppliers upside the head again, making the supplier realize they could be making more money if they sold more mustaches, and at a higher price. After competitive suppliers get some wise guidance from the smack smack of the invisible hand...we get market equilibrium.
Just like Goldilocks, the invisible hand says “not too much, not too little, but juuuuuusssst right.”
Related or Semi-related Video
Econ: What is Market Equilibrium?4 Views
And finance Allah shmoop what is market equilibrium All right
people when we're talking market equilibrium we're talking about the
market for a specific good or service pick a thing
Anything Market equilibrium happens when the quantity demanded of a
thing equals the quantity supplied of a thing at a
given price Well at market equilibrium there's no excess supply
which would mean you know cranky suppliers and no excess
demand which would mean cranky consumers at equilibrium Everybody's chill
at a price Well the reason economist gush over market
equilibrium like a diehard believer at a J Beat's concert
is because well it's kind of a magical force of
its own Like the mother nature of capitalism When the
market is competitive market equilibrium happens naturally If you ever
heard of Adam Smith's invisible hand well this is what
he was talking about In a perfectly competitive market where
there are lots of equally size sellers selling no Amazons
or Walmart stopping all over the little guy's the invisible
hand is what keeps surpluses and shortages from happening For
example the fake mustache market Yes there's a market for
that where the mustache supply curve crosses with the mustache
demand curve And that's where mustache equilibrium is that drop
a plumb line down from equilibrium to see the equilibrium
Quantity of moustache is likewise You can see the equilibrium
price where the supply and demand curves cross on the
left hand side of graft In our perfectly competitive mustache
market the amount of moustache is sold in the price
they're soul That is capitalism's invisible hand at work When
suppliers try to sell their fake mustache is at too
high a price Consumers will Balkh They'll think it's a
rip off and go buy somewhere else instead Leaving cellars
with a surplus of fake mustache is Remember the mustache
market has many mustache suppliers all competing against one another
well because consumers will flock to the mustache supplier with
the best value like best prices in this case since
it's all the same moustache Will this keep suppliers from
holding the fake mustache market hostage Many mustache The buyers
competing for the dollars of mustache buyers will naturally drive
prices down if they're too high Well the invisible hand
smacks mustache suppliers upside the head making suppliers realized they
should drop their price if they want to sell some
moustache is but they don't want to make the price
too low because well if suppliers dropped the price of
a fake moustache is too low Well there will be
a mustache shortage in a while We can't have that
right The moustache will be super cheap Everyone rushed to
buy one and there won't be an in store and
people be cranky Yes when there's a shortage of moustache
is there's an ugliness Not even the best fake mustache
could cover up Consumers will be at each other's throats
Fighting over fake moustache is like it's Black Friday or
something like that When they're all sold out consumers will
be demanding Mauritz just too good of a deal So
in the case of a moustache shortage the invisible hand
will be smacking mustache suppliers upside the head again making
the supplier realized they could be making more money if
they sold more Mustache is and at a higher price
Well after competitive suppliers get some wise guidance from the
smack smack invisible hand We get market equilibrium Just like
Goldilocks The invisible hand says Uh not too much not 00:03:08.503 --> [endTime] too little but just right Yeah