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Introducing Supply and Demand

3. Market Equilibrium - Clearing the Market at Equilibrium Price and Quantity

When a market achieves perfect equilibrium there is no excess supply or demand, which theoretically results in a market clearing.

LEARNING OBJECTIVES

Define market equilibrium

KEY TAKEAWAYS

Key Points
  • The interdependent relationship between supply and demand in the field of economics is inherently designed to identify the ideal price and quantity of a given product or service in a marketplace.
  • A market clearing, by definition, is the economic assumption that the quantity supplied will consistently align with the quantity demanded.
  • Market clearing requires a variety of assumptions which simplify the complexities of real markets to coincide with a more theoretical framework, most centrally the assumptions of perfect competition and Say's Law.
  • While this concept of market clearing resonates well in theory, the actual execution of markets is very rarely perfect. The concepts of consolidated markets and 'sticky' markets reduces the accuracy of these models.

Key Terms
  • Say's Law: The idea that money is perishable.
  • Incumbents: A holder of a position as supplier to a market or market segment that allows the holder to earn above-normal profits.
  • Opportunity cost: The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative.

The interdependent relationship between supply and demand in the field of economics is inherently designed to identify the ideal price and quantity of a given product or service in a marketplace. This equilibrium point is represented by the intersection of a downward sloping demand line and an upward sloping supply line, with price as the y-axis and quantity as the x-axis. At perfect equilibrium there is no excess demand (represented by 'A' in the figure) or excess supply (represented by 'B' in the figure), which theoretically results in a market clearing.

Equilibrium Pricing: This chart effectively highlights the various basic implications of a simple supply and demand chart. The equilibrium point is where market clearing will theoretically occur.