Market Equilibrium

Introduction

There are very few times during which a market is in equilibrium, but being in equilibrium is probably one of the best things that can happen to a market. Market equilibrium is when the supply of a good is exactly the same as the demand for that good.

Law of Demand and Supply

The Law of Supply states that as the price of a product increases, so does the supply, and vice versa. This shows up in a similar graph as such:

The Law of Supply states that as the price of a product increases, so does the supply, and vice versa. This shows up in a similar graph as such:

In order for market equilibrium to even exist, the good must have supply and demand. If we put the supply and demand on the same graph, we would end up with a graph as such:

The point at which the two lines intersect (shown by the red dot) is defined to be the equilibrium. When the market is at this point, the supply matches the demand, so there is no excess supply or demand.

Reaching the Equilibrium

The goal of any company should be to reach this point. This can be achieved in many ways, depending on the situation of the company. If the company is at the purple dot or blue dot, then the company is going to experience a shortage in supply and the demand will be too high for the company to handle. If the company is at the orange dot or green dot, the supply will exceed the demand greatly, so the company will have extra supply and not enough demand.

Surplus and Shortage

If the company experiences a surplus or shortage, the company will not be making as much revenue as it possibly could. If there is a surplus, then the company will have extra goods left over,