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Competitive Market Equilibrium - Coggle Diagram
Competitive Market Equilibrium
Definitions
Market Equilibrium
Market equilibrium refers to a state where opposing forces (of demand and supply) offset each other exactly. It occurs when buyers and sellers come together and exchange at a mutually agreeable price and quantity. and when a market is in equilibrium, there is no tendancy for the quantity or price to change.
Equilibrium price
equilibrium price refers to the price at which quantity demanded and quantity supplied are equal, and it is the price where the market is cleared.
Market Disequilibria
Market disequilibria is a result of the change in any one of the factors affected demand or supply of a good. The resultant shortage or surplus will trigger a change in the price of the good that brings about change in quantity of the good, which allows a new equilibrium price and quantity to be attained.
Determination of market equilibrium
Excess in supply (surplus)
Excess supply refers to a situation where quantity supplied exceeds quantity demanded. It occurs when the price of a good is above equilibrium price.
When there is excess supply, it means that sellers are unable to sell all the goods that they offer tor sale. The surplus exerts a downward pressure on price as sellers try to get rid of excess stocks by lowering price. Some sellers who are unwilling or unable to reduce quantity supplied of the good at the lowered price will result in the downward movement of the supply curve. As price of good fall, quantity demanded will increase, leading to a downward movement of demand curve
Price of the good continue to fall until surplus is eliminated and market equilibrium is attained.
Excess in demand / shortage in supply
Excess demand refers to a situation where quantity demanded exceeds quantity supplied of the good. It happen when price of the good is less than equilibrium price.
When there is excess in demand, some buyers will not be able to obtain the good at the prevailing price. This exerts an upward pressure on price as unsuccessful consumers will be willing to pay a higher price to purchase the good. Consumers who are unmilling or unable to pay a higher price Will reduce quantity demanded, leading to a upward movement on demand curve. on the other hand, sellers respond to increase in price by increasing quantity supplied, leading to upward movement along supply curve.
Price continue to rise until shortage is eliminated and market equilibrium is reached.
impacts of changes in demand or supply on market equilibrium
Changes in demand
increase in demand
When there is an increase in demand, ceteris paribus, the demand curve will shift to the right (from
to
)
This causes a shortage at the original equilibrium price (_)
The shortage exerts an upward pressure on price as unsuccessful consumers will be willing to pay more to purchase the good. At the same time, consumers who are unwilling or unable to pay a higher price for the good will cause quantity demanded to fall (from
to
), causing an upward movement along the demand curve.
On the other hand, sellers respond to the increase in price of the good by increasing their quantity supplied of the good.
Price will continue to increase, quantity demanded and supplied will continue to decrease and increase respectively until a new equilibrium point is attained, where both the quantity and price have risen.
Decrease in demand
When there is a decrease in demand, ceteris paribus, the demand curve will shift to the left (from
to
)
This causes a surplus to form at the original equilibrium price (_)
the surplus exerts a downward pressure on price as sellers will want to get rid of their excess stocks. some sellers who are unwilling or unable to sell their goods at a lower price will cause the quantity supplied of the good to fall, this decrease causes a downward movement along the supply curve.
At the same time, when price falls, quantity demanded will increase as seen by a downward movement along the new demand curve.
Price of the good will continue to fall, quantity demanded and supplied will continue to increase and decrease until surplus is eliminated, and new equilibrium point is attained, where both price and quantity of the good has fallen.
changes in supply
increase in supply
When supply of a good increases, ceteris paribus, the supply curve will shift to the right.
This causes a surplus at the original equilibrium price
The surplus exerts a downward pressure on price of the good as sellers try to get rid of their excess stocks. Some sellers who are unwilling or unable to reduce their quantity supplied at the lowered price will cause quantity supplied to fall, as seen by a movement down the supply curve.
At the same time, when price of a good increases, quantity demanded will increase, as seen from a downward movement on the demand curve.
Price of the good will continue to fall until the surplus is eliminated and new equilibrium is achieved, where equilibrium price falls and equilibrium quantity increases.
Decrease in supply :
When the supply of a good decreases, ceteris paribus, the supply curve will shift to the left.
This results in a shortage at the original equilibrium price.
The shortage exerts an upward pressure on price of the good as unsuccessful consumers will be willing to pay a higher price to purchase the good. Some consumers who are unwilling or unable to purchase the good at the increased price will cause quantity demanded to fall, as seen by upward movement along the demand curve.
At the same time, when prices of a good rise, the quantity supplied of the good will increase as seen from a upward movement of the supply curve.
Price of the good will continue to rise until the surplus is eliminated and new equilibrium point is attained, where equilibrium price rises and equilibrium quantity decreases.
Duty of price mechanism
The duty of the price mechanism in a free market economy is to coordinate the independent decisions of buyers and sellers and to ensure that market equilibrium is ALWAYS ACHIEVED.