Market Equilibrium Pt. 3

The market-clearing equilibrium price is the only price at which the quantity demanded equals the quantity supplied. At this price, buyers can buy all they want (based on their utility), and seller can produce and sell all they want (based on their cost). There is no reason for anyone to change his or her buying or selling behavior. There are no disappointed buyers or sellers.

At a price above equilibrium, there is excess supply – a greater quantity offered for sale than consumers desire to purchase at that price. Spoilage, obsolescence, and the possibility of changing tastes by consumers force the sellers to lower their "asked" price. The dropping price forces some sellers out of the market (why) but brings more buyers into the market (why?).

At a price below equilibrium, there is excess demand – a greater quantity desired to be purchased by consumers than sellers desire to produce. Competitive bidding among buyers forces up the price, bringing more sellers into the market and causing some buyers to drop out, until equilibrium is reached.

Markets are always moving toward equilibrium – this is what gives rationality and direction to the economic actors, and gives them the signals by which they can coordinate their actions without any central direction.

Class Notes | Clint Johnson |  Economics & Finance | Departments & Majors
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