1. The document discusses market equilibrium, which occurs at the price where the quantity demanded equals the quantity supplied. Both supply and demand factors are needed to determine the equilibrium price and quantity. 2. Market equilibrium exists where willing buyers and sellers agree on a price in a free market without government controls. At equilibrium, the market clears with no surplus or shortages. 3. The equilibrium price is found where the supply and demand curves intersect. A change in demand or supply can shift the curves and change the new equilibrium price and quantity. Multiple equilibria or no equilibrium can potentially exist depending on the curve shapes.

1. MARKET EQUILIBRIUM
Prof. Prabha Panth
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2. What determines market price?
• Classical economists: cost of production
determines market price.
• Utilitarians thought that demand determined
market price.
• Marshall pointed out that both D and S are
needed to determine market price.
• D and S are like two blades of a pair of
scissors, both are needed to cut material.
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3. Market
• Market is where willing buyers meet willing
sellers, for exchange of goods and services.
• Could be local, national or international markets.
• Refers to Perfect Competition, or a Free Market,
without Government controls.
• Both buyers and sellers agree to the market price.
• At equilibrium, Qd = Qs.
• The market is cleared, i.e. at the given price there
is no surplus of supply,
• Or unsatisfied demand, or shortages.
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4. Market Equilibrium
• Supply and demand are opposing forces.
• When P increases D decreases, but S
increases.
• When P decreases D increases, but S
decreases.
• But there could be one price at which D = S.
• This is the point of Market Equilibrium.
• With Equilibrium P and Equilibrium Q.
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5. Market Equilibrium
P (Rs) Qd
(Kgs)
Qs
(Kgs)
1 10 2
2 8 4
3 6 6
4 4 8
5 2 10
* At P = Re.1, Qd = 10 Kgs, Qs = 2
Kgs. Deficiency of S.
Since D > S, sellers increase P.
When P D falls, but S increases.
This goes on till P = Rs.3.
At this point Qd=Qs = 6 Kgs. This
is Equilibrium Price.
* At a higher price, Rs.5, Qd=2 Kgs,
but Qs=10 Kgs. Surplus S.
As S > D, P falls.
As P falls, Qd increases, and Qs
decreases.
This goes on till the Equilibrium
P Rs.3 is reached.
*Equilibrium quantity = Qd = Qs = 6
Kgs.
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6. D and S equations
• Let Qd = 14 -2P, and Qs = 4 + 2P
• What are Equilibrium P and Q?
• We know that at equilibrium Qd = Qs,
14 – 2 P = 4 + 2P
Or 10 = 4P
Or P = 10/4 = Rs.2.5
Equilibrium P = Rs.2.50
Substituting P = 2.5 to get Q:
14 – 2 (2.5) = 14 – 5 = 9 Kgs (Qd)
4 + 2(2.5) = 4 + 5 = 9 Kgs (Qs)
Equilibrium Q = 9 Kgs
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7. Equilibrium with Shifts in Demand
Curve
Rs
0 Qx
D1
D1S
S
P’
Q’
E
D2
D2
P1
F
Q1
If Market D 
shifts to the
right, but no
change in S.
Then the new
equilibrium = F,
price increases
to P1 and
quantity to Q1,
If Market D, or
shifts to the left,
No change in
supply,
Then both
equilibrium P
and Q decrease.
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8. Market Equilibrium
Rs
Qx
0
D
D
S
S
P=5
d =2 s =10
D < S,
surplus, P
P=1 d =10s=2 D > S,
deficit, P
P=3
E
Qd=Qs=6
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9. Shifts in Supply Curve
Rs
0
Qx
P’
E
Q’
D
DS
S
S1
S1
P1
F
Q1
If total S,
shifts to the
right, no
change in D,
Then new
equilibrium= F,
price falls to P1,
and Q increases
to Q1.
Opposite effect
when S shifts to
the left.
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10. Stability, Uniqueness and Existence of
Market Equilibrium
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11. Stable Equilibrium
• Stable Equilibrium: when any disturbance to the
equilibrium generates forces that bring the
system back to the original position.
• In certain situations, the price and Q do not
return to the original position.
• This is called Unstable Equilibrium.
• This occurs when D or S curves do not have their
characteristic shapes,
• Then P and Q will move progressively away from
the original equilibrium.
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12. Stable Market Equilibrium
Rs
Qx
0
D
D
S
S
P=5
d =2 s =10
D < S,
surplus, P
P=1 d =10s=2 D > S,
deficit, P
P=3
E
Qd=Qs=6
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13. Unstable Equilibrium
Rs
0
Qx
D
D
S
S
P’
E
Q’
P1
d1
s1
When D > S, P
increases
Rising D-curve
(luxuries).
• E is equilibrium.
• If P is higher, P1, D >
S, so P rises.
• If P is lower, P0, D <
S, price falls.
• So the system can
never come back to
the former
equilibrium.
When D < S, P
decreases
s2
d2
P0
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14. Unstable Equilibrium
Rs
0 Qx
D
D
S
S
P’
E
Q’
P0
s1
d1
When D < S, P
decreases
s2 d2
When D > S, P
increases
Falling S-curve
(decreasing costs).
• E is equilibrium.
• If P is lower, P0,
D < S, so P falls.
• If P is higher at
P1, D >S, price
rises.
• So the system
can never come
back to the former
equilibrium.
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15. Uniqueness of Equilibrium
• Will there be only one
market P and Q?
• Empirical analysis
shows that the
smooth and
customary shapes of D
and S may not exist.
• Possible to have
multiple equilibria.
• Then which is the
actual equilibrium?
S
Rs
0
Q
D
D
S
a
b
c
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16. Existence of Equilibrium
• Does equilibrium exist at all?
• It can exist if D and S curves cut each
other in the positive quadrant only.
• This is correct theoretically,
• But D and S curves, drawn from collected
data may not cut each other at all.
• Then there is no equilibrium.
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17. Rs
0
Q
P
D
S Here though D
and S have their
normal shapes,
they do not
intersect in the
positive
quadrant.
Equilibrium P is
negative.
So equilibrium
does not exist
E
Q1
17
No Equilibrium
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18. Q
0
Rs
D
S
P
 Q
E
Here D and S do
not intersect in
the positive
quadrant.
Equilibrium Q is
negative.
So equilibrium
does not exist
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19. What other factors determine prices?
Price
1.Competition
2. Costs
3. Demand
4. Life cycle
5. Sales
channels
6. Government
policy
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20. Questions
I. Short answers:
1. Define Market Equilibrium, and depict it with the
help of a diagram.
2. Estimate the market P and Q from the following
equations: Qd = 45 – 10P, and Qs=5+10P
3.Is equilibrium always unique? Show with the help
of a diagram.
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21. II. Essay Questions:
1. What are the characteristics of Market
equilibrium? Draw diagrams to illustrate your answer.
2. Explain with the help of diagrams, the equilibrium
P and Q, when (a) D curve shifts to the right, S
constant, and (b) when S curve shifts to the left, D
constant.
3. What is unstable equilibrium? Under what
conditions does it exist. Illustrate.
4. When is it not possible to achieve market
equilibrium? Draw diagrams to illustrate your answer.
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