Post on 23-Jun-2020
3. MARKET EQUILIBRIUM
Now that you understand demand and supply we can now combine them to explain equilibrium in the market for a particular good or service.
3.1. Excess supply and demand
At any other price there is disequilibrium in the form of excess supply and excess demand. When there is disequilibrium, market forces are set in motion to move the market towards equilibrium.
The demand and supply of potatoes in the market on a particular day
Definition: The market is in equilibrium when the quantity demanded is equal to the quantity supplied. The price at which this occurs is called equilibrium
Column 1: shows the various prices for potatoes on a given day (in Rands per kilogram).Column 2: shows the quantity demanded at various prices.Column 3: shows the quantity supplied at various prices.Column 4: shows the difference between quantity demanded and supplied and the last Column 5: shows the direction of the pressure put on the price of the product.
When the quantity demanded is greater than the quantity supplied there is excess demand – market shortageWhen the quantity supplied is greater than the quantity demanded there is an excess supply – market surplus.
To illustrate equilibrium we also make use of a schedule (Demand and Supply schedule) and we make use of a graph (Demand and supply graph)
Price per potatoes
(R/kg)
Quantitydemanded
(R/kg)
234567
400350300250200150
Quantitysupplied(R/kg)
0100150250300350
Graph for supply and demand for potatoes on a given day
QUANTITY
DAY
S
0
1
2
3
4
5
6
7
50 100 150 200 250 300 350 400
S
SD
D
E
Price of potatoes(R/kg)
Quantity demanded(R/kg)
Quantity supplied(R/kg)
Excess supply /Excess demand
Pressure onPrice
2
3
4
5
6
7
400
350
300
250
200
150
0
100
150
250
300
350
400 excess demand
250 excess demand
150 excess demand
Equilibrium
100 excess supply
200 excess supply
Upward
Upward
Upward
None
Downward
Downward
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