MARKET EQUILIBRIUM
Market Equilibrium is the point when the supply curve and the demand curve intersect. This is also the point where marginal benefit equals marginal cost.
http://en.wikipedia.org/wiki/File:Supply-demand-equilibrium.svg
How is the price discovered?
A market price is established from competition. The quantity of goods/services demanded by consumers is equal to the quantity of goods/services produced by sellers. This price is sometimes referred to as the competitive price or market clearing price and won’t change unless demand or supply curve shifts. The interaction of buyers and sellers enables a price to be discovered over time.
It is hard to appreciate this process because in our modern market place most prices of produced goods are set by the seller. Either the buyer is both willing and able to purchase the good/service for the price or is not willing and able to buy at that price so they do not make the purchase. Consumers may feel they have no influence over the market price but that is not true. If there are not enough consumers for a good/service the producer will have to change the price or they will not make a profit.
Buyers have great influence over the price that the market sells at. To have a market work efficiently there must be a perfect exchange of information between consumers and producers so the good/services can be sold at the optimal equilibrium.
Market Surplus and Shortage
A Market Surplus occurs when there is excess supply when quantity supplied is greater than quantity demanded. In this situation, some producers won't be able to sell all their goods, forcing them to lower their price to make their product more appealing.
A Market Shortage occurs when there is excess demand when quantity demanded is greater than quantity supplied. In this situation, consumers won't be able to buy as much of a good as they would like. As a result to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply.
A market price is established from competition. The quantity of goods/services demanded by consumers is equal to the quantity of goods/services produced by sellers. This price is sometimes referred to as the competitive price or market clearing price and won’t change unless demand or supply curve shifts. The interaction of buyers and sellers enables a price to be discovered over time.
It is hard to appreciate this process because in our modern market place most prices of produced goods are set by the seller. Either the buyer is both willing and able to purchase the good/service for the price or is not willing and able to buy at that price so they do not make the purchase. Consumers may feel they have no influence over the market price but that is not true. If there are not enough consumers for a good/service the producer will have to change the price or they will not make a profit.
Buyers have great influence over the price that the market sells at. To have a market work efficiently there must be a perfect exchange of information between consumers and producers so the good/services can be sold at the optimal equilibrium.
Market Surplus and Shortage
A Market Surplus occurs when there is excess supply when quantity supplied is greater than quantity demanded. In this situation, some producers won't be able to sell all their goods, forcing them to lower their price to make their product more appealing.
A Market Shortage occurs when there is excess demand when quantity demanded is greater than quantity supplied. In this situation, consumers won't be able to buy as much of a good as they would like. As a result to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply.
http://piigsty.com/2011/10/11/economics-101-8-market-equilibrium/
Allocative Efficiency
Allocative efficiency in the market is the state when production is representing consumer preferences. All goods/services are produced to the point where the last unit provides a marginal benefit to the consumer that is equal to the marginal cost of producing. Price is equal to marginal cost at the point of allocative efficiency. When the market is efficient there is no deadweight loss.
Allocative efficiency in the market is the state when production is representing consumer preferences. All goods/services are produced to the point where the last unit provides a marginal benefit to the consumer that is equal to the marginal cost of producing. Price is equal to marginal cost at the point of allocative efficiency. When the market is efficient there is no deadweight loss.
Consumer Choice and Marginal Utility
Consumers make rational decisions for self interest. If two products are of equal benefit to a consumer, then he or she will choose the cheaper product. If two products are the same price, the consumer will choose the one that provides the greater benefit. Limited income enforces choice. Consumers have to make choices as to what goods will be purchased or not purchased.
Purchasing an item means that less capital is available to purchase other goods/services. The Law of Diminishing Marginal Utility states that as each additional unit of a good is consumed, the amount of marginal utility will decrease.
Consumers make rational decisions for self interest. If two products are of equal benefit to a consumer, then he or she will choose the cheaper product. If two products are the same price, the consumer will choose the one that provides the greater benefit. Limited income enforces choice. Consumers have to make choices as to what goods will be purchased or not purchased.
Purchasing an item means that less capital is available to purchase other goods/services. The Law of Diminishing Marginal Utility states that as each additional unit of a good is consumed, the amount of marginal utility will decrease.
In this video you will see how is Equilibrium price determined, why it might change, and is also about surplus and shortages.
Check-in Quiz
Here is a check-in to test your knowledge on equilibrium and supply & demand.
http://highered.mheducation.com/sites/0077099478/student_view0/chapter3/self-test_questions.html
References
(n.d.). Retrieved June 10, 2015, from http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/marginal-
Economics Online. (n.d.). Retrieved June 10, 2015, from http://www.economicsonline.co.uk/Competitive_markets/Market_equilibrium.html
Market Surpluses & Market Shortages. (n.d.). Retrieved June 10, 2015, from http://www.econport.org/content/handbook/Equilibrium/surplus-and-shortage.html
Impacts of Surpluses and Shortages on Market Equilibrium - Boundless Open Textbook. (n.d.). Retrieved June 10, 2015, from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/introducing-supply-and-demand-3/market-equilibrium-48/impacts-of-surpluses-and-shortages-on-market-equilibrium-180-12278/
MARKET EQUILIBRIUM. (n.d.). Retrieved June 10, 2015, from http://staffwww.fullcoll.edu/fchan/Micro/1MKTEQUIL.htm