Lesson Overview
Markets bring buyers and sellers together. But how is the final price determined?
The answer lies in market equilibrium — the point where quantity demanded equals quantity supplied.
In this lesson, you will learn how prices adjust to eliminate shortages and surpluses, guiding markets toward balance.
Learning Objectives
- Define market equilibrium.
- Explain how equilibrium price and quantity are determined.
- Identify shortages and surpluses.
- Understand how price signals coordinate economic activity.
What Is Market Equilibrium?
Market equilibrium occurs at the price where:
- Quantity demanded = Quantity supplied
- There is no shortage
- There is no surplus
At this point, the market "clears" — all goods produced are sold.
Shortages
A shortage occurs when quantity demanded exceeds quantity supplied.
This typically happens when price is set below equilibrium.
- Consumers compete for limited goods.
- Prices tend to rise.
- Producers increase output.
Surpluses
A surplus occurs when quantity supplied exceeds quantity demanded.
This typically happens when price is set above equilibrium.
- Goods remain unsold.
- Producers lower prices.
- Production decreases.
Price as a Signal
Prices communicate information.
Rising prices signal scarcity and encourage production. Falling prices signal excess supply and discourage production.
This self-correcting mechanism helps markets allocate resources efficiently without central direction.
Graphing Equilibrium
On a supply and demand graph:
- The downward-sloping curve represents demand.
- The upward-sloping curve represents supply.
- Their intersection marks equilibrium price and quantity.
Any deviation from this point creates pressure for price adjustment.
Practice Questions
- If the market price is below equilibrium, what happens?
- What forces push prices downward during a surplus?
- Why does equilibrium eliminate unsold goods?
Reflection Prompt
Think about a product whose price recently increased.
- Was demand rising?
- Was supply restricted?
- How did the price change affect buyers and sellers?
What’s Next?
In Lesson 2.4: Shifts in Supply and Demand, we will examine how external factors move equilibrium and reshape markets.