Market equilibrium is an economic condition where supply and demand for a good or service are balanced, resulting in stable prices. At this point, the quantity of the good or service that consumers are willing to buy equals the quantity that producers are willing to sell.
In graphical terms, market equilibrium is represented by the intersection of the supply curve and the demand curve on a graph where the x-axis represents quantity and the y-axis represents price. The price at this intersection is known as the equilibrium price, and the quantity is the equilibrium quantity.
When the market is in equilibrium:
- If the market price is above the equilibrium price, there is a surplus of goods, meaning supply exceeds demand. Producers may lower prices to clear their excess inventory.
- Conversely, if the market price is below the equilibrium price, there is a shortage, meaning demand exceeds supply. In this case, prices are likely to rise as consumers compete to purchase the limited goods available.
Market equilibrium is dynamic and can shift due to changes in factors such as consumer preferences, production costs, and external economic conditions.