Market Equilibrium

Market Equilibrium:

Equilibrium occurs in a market when the price has no tendency to change. This occurs at the price at which the quantity demanded equals the quantity supplied. Only at the market equilibrium price do buyers buy the quantity they want and sellers get to sell the quantity they want. No one wants to buy or sell anymore.

Market equilibrium achieves when the supply and demand curves cross marks. When the market price is above the market equilibrium price where quantity supplied is more than quantity demanded, excess surplus occurs causing a fall in the market price. While when the market price is below the market equilibrium price, quantity demanded exceeds quantity supplied, shortage occurs causing a hike in the market price.

Agricultural products such as fruits, soybeans, wheat and so on are basically about the equilibrium prices. Due to the unpredictable market conditions, the prices of wheat may be changing very often. The following could be explained with a table below.

             The market equilibrium price is 80 cents. The quantity demanded and quantity supplied is the same, which is 85, at the price of 80 cents.

At any price higher than the equilibrium price, there will be a surplus where the producers are willing to produce and also to supply more wheat than consumers want to buy. At the price of 90 cents, the surplus is 70 units. The market is not in equilibrium because the producers has an excessive surplus of 115 units as they are not able to sell their products out therefore lowering the prices of wheat to the buyers may be the last option for the farmers while for the consumers’ demand only stands for 45 units.

At the price of 80 cents, the market achieves market equilibrium, where quantity demanded and quantity supplied stands at 85 units. At this period of time, buyers are acquiring the most wheat when they intend to at the price of 80 cents while the producers are selling the most wheat at 80 cents therefore no one has the intention to neither buy nor sell the wheat.

Prices that is lower than the equilibrium price causes a shortage. According to the table, the quantity demanded of wheat by the buyers is at 125 units and it will be stronger than the quantity supplied, which is only at 55 units causing to a shortage of 70 units at the price of 70 cents. This indicates that the market is not equilibrium, buyers insist on the suppliers to increase the supply. The explanation mentioned above could be explained with a graph shown below.

Changes In Equilibrium:

Market forces adjust the price and quantity of a good or service until they correspond to where the demand curve crosses the supply curve. After the price and quantity reach that point- the market equilibrium, it remains unchanged as long as the demand and supply curve is left unchanged. Prices and quantities do adjust when there is a change in the demand and supply curve.

Supply Increase ; Demand Increase. 

When there’s a hike in demand and decrease in supply, it leads to a higher equilibrium price and higher quantity exchanged. Between the beginning of 2006 and the middle of 2007, the price of corn doubled while the demand for other food products were relatively stable. While the main cause driven the price of corn to increase was not due to the decrease of supply of corn but it was the increased demand of ethanol, an alcohol-like substance that is blended with conventional gasoline. Producers in the United States refine ethanol mainly from corn. The market achieved new equilibrium when there is an increase in demand; it shifts the demand curve to the right from D0 to D1. The increase in demand of corns upped the equilibrium price of corn from P0 to P1, leading the quantity exchange of corns shifting to Q0 to Q1. The following is shown by the graph above.

Supply Decrease ; Demand Decrease.

Next, when there is a low supply, it pushes up the equilibrium prices as well as the quantity exchanged. Due to the unfavorable weather condition, every now and then we hear news that the reduction of crops such as lettuce, apples and so on. For example, the severe freeze destroys most portions of lettuce crop. This would lead to a decrease in supply, supply curves shift to the left from S to S1. The freeze does not affect the demand for the lettuce as at each price level consumers still desire as much lettuce as before therefore D0 does not shift. The leftward shift of the supply curve from S0 to S1 causes the push in equilibrium price from P0 to P1, due to the increase in price, the quantity demanded for lettuce reduced from Q0 to Q1. The decrease of supply of lettuce is shown in the graph above.

Supply Increase ; Demand Decrease.

Several decades ago, people who caught pink salmon earned as much as $1 for each pound of pink salmon. As time passed by, supply and demand changed in the market for pink salmon. High profits made by producers attracted many new fishers to enter the market leading to a huge increase in supply of pink salmon. However, over the years, the change in consumers’ income and reduction of price of substitution products caused the drop in demand for pink salmon. Because of the improvement in living environment, consumers tend to move to a higher quality fresh or frozen fish, such as the Coho salmon. Other than that, the improvement in technology created more efficient fishing boats greatly increased the catch and also reduced the cost of it. Therefore, there are changes in supply from S1 to S2 while the demand of pink salmon also decreased from D1 to D2 whereas equilibrium price reduced from P1 to P2 as the increase in supply exceeded the decrease in demand. The following could be seen in the graph shown above.

                              

Supply Decrease ; Demand Increase.

For the past few years, the price of gasoline has increased rapidly. For example, the average price of a gallon of gasoline rose around $2 in 2004 to about $4 in 2007. With the figure shown below, the price of a gallon of gasoline at P0, represents the $2 price. Supply uncertainties relating to Middle East politics and warfare and rapid growth of demand of oil for fast-growing countries such as China leads to the hike of price per barrel of oil from $37 in 2004 to $80 in 2007 as oil is the main input producing gasoline. With the increase in cost, it decreases the supply of gasoline causing a leftward shift from S0 to S1 in the figure shown below. While the supply of gasoline reduced, the demand for gasoline increased, leading to a rightward shift of the demand curve from D0 to D1. Due to the reduced supply of gasoline and increased demand for gasoline, it pushes the price of gasoline from P1 to P2 in the figure shown below. As the demand increase outweighed the supply decrease, the equilibrium quantity increased from Q0 to Q1.

                                                                                                   

In short, the table shown below will be a short summary of effect of changes in both supply and demand.