by Equilibrium means a state of no change. Evidently, at the equilibrium price, both buyers and sellers are in a state of no change. Technically, at this price, the quantity demanded by the buyers is equal to the quantity supplied by the sellers. Both market forces of demand and supply operate in harmony at the equilibrium price.
The equilibrium price is the price where the quantity demanded is equal to the quantity supplied. That quantity is known as the equilibrium quantity.
Graphically, this is represented by the intersection of the demand and supply curve. Further, it is also known as the market clearing price. The determination of the market price is the central theme of microeconomics. That is why the microeconomic theory is also known as price theory.
Equilibrium means a state of no change. Evidently, at the equilibrium price, both buyers and sellers are in a state of no change. Technically, at this price, the quantity demanded by the buyers is equal to the quantity supplied by the sellers. Both market forces of demand and supply operate in harmony at the equilibrium price.
Graphically, this is represented by the intersection of the demand and supply curve. Further, it is also known as the market clearing price. The determination of the market price is the central theme of microeconomics. That is why the microeconomic theory is also known as price theory.
Equilibrium Price Can Resist Change
As already mentioned, both consumers and sellers do not want to shift from the equilibrium price. In that case, the equilibrium price can change only when there is a change in both demand and supply. An increase in only demand or only supply is taken by horns by a self-adjusting mechanism.
When the price of commodity increases, the sellers flock to the market with their products for an opportunity to earn higher profits. This creates a condition of excess supply, ultimately leading to a surplus of the particular product in its market.
In order to sell this surplus, the sellers have to reduce the price. Effectively, the price continues to fall until it reaches the equilibrium level.
When the price of a commodity decreases, the consumers sense an opportunity to buy the product at a lower price. This creates gives birth to excess demand in the product’s market.
Consequentially, there starts brewing a situation of competition among the buyers which eventually pushes up the price. Eventually, the price continues to rise until it reaches the equilibrium level.
Note that the supply and demand schedule mentioned above is an indicator of all these processes.
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