Market Equilibrium Price
- Equilibrium refers to a situation where there is no tendency or pressure towards change under certain conditions of supply and demand.
- If, however, there should develop a change in these conditions, then the equilibrium price would change, ie., change in the costs of production, new firms entering the market or existing ones leaving the industry, consumers becoming more wealthy or a change in the price of substitute or complementary goods.
Refer to diagram ( Right):
- At the equilibrium price indicated, there is no pressure for change once this price is arrived at.
- Producers are selling all of their output at this price so there is no need for them to reduce the selling price in order to sell all of their output.
- Similarly, all consumers who are prepared to buy at that price can be accommodated by the supply which is forthcoming so that no consumer has to offer a higher price in order to acquire the good.
- An excess supply (surplus) in the market implies that the price is greater than the market price.
- When there is a surplus or excess supply for a good, suppliers are unable to sell all they want at the going price.
- Sellers find stocks increasing so they respond to the surplus by cutting their prices.
- Some sellers in the market respond to the falling price by reducing the amount they are willing to offer for sale.
- As the prices falls, some consumers are persuaded to buy more and so there is a movement along the demand curve. Prices continue to fall until the market reaches equilibrium point.