Market Equilibrium: Influences & Calculations

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  • 0:01 Market Equilibrium
  • 0:34 What Is Market Equilibrium?
  • 3:03 Problems And Changes
  • 4:41 Lesson Summary
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Lesson Transcript
Instructor: Christopher Sailus

Chris has an M.A. in history and taught university and high school history.

In this lesson, we explore the concept of market equilibrium. We'll learn the basics of supply and demand and discuss the factors that can push the market out of equilibrium or change the equilibrium point altogether.

Market Equilibrium

Do you remember the playground teeter-totter? Kids could push themselves off the ground on one side into the air, bringing the child on the other side back toward the ground. Occasionally someone would think it was funny to shift their weight so that the other child stayed in the air, or other times, the kids would work together to try to balance the teeter-totter right in the middle. If they achieved this point, even if only for a second, they were in equilibrium!

In this lesson, we'll talk about another careful balancing act that also may only be achieved for mere moments: market equilibrium.

What Is Market Equilibrium?

In order to understand market equilibrium, we should first discuss what exactly is going on on the two sides of our economic teeter-totter. In this case, we are talking about two of the most basic market indicators: supply and demand.

Demand refers to the total number of a certain good or product that consumers are willing to buy. This number changes according to price. Just like you would probably buy double the amount of apples if they were suddenly half price, the demand quantity of a good rises as the price of that good lowers. We know this by looking at tables economists compile, called demand schedules, that detail how much of each product consumers are willing to buy at each price. These schedules can then be graphed, giving us a demand curve.

On the other hand, supply refers to the total number of goods the producers of that good are willing to supply to the market depending on the price. The quantity producers are willing to supply generally rises as the price consumers are willing to pay for a good goes up. This makes sense: if you sold pens for $1 each but suddenly people were willing to pay $2 for the same pens, you would probably rush to sell as many pens as you could before the market price changed back. Just as with demand, economists compile supply schedules showing us how much of each product producers are willing to send to market given each price. These numbers are also graphed, giving us the supply curve.

So now that we've established what's on each side of our economic teeter-totter, let's talk about that balancing point between the two, a point economists term market equilibrium. Market equilibrium is a point in price where the amount producers are willing to supply and the amount consumers are willing to buy is the same.

For example, say I am growing apples and you want to buy some apples. I am willing to bring you one apple if you buy it for $1, two apples if you buy them for $2, and three apples if you buy them for $3. You, however, are a prudent buyer; you will purchase three apples if they are $1, two apples if they cost $2, but only one apple if it costs $3.

That point where our two pricing schedules meet - at two apples for $2 - is market equilibrium. It's the optimum point for both producer and consumer. Theoretically, I could keep bringing you two apples a week and charging you $2 each for them for eternity.

The market equilibrium point can also be represented graphically, using the supply and demand curves discussed above. The point where the supply and demand curves intersect is considered market equilibrium.

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