What is Equilibrium?
- The state of the market where there is no tendency for either demand or supply to change. i.e quantity demanded is equal to quantity supplied
Equilibrium Price: The price that clears the market, where the quantity demanded quals to the quantity supplied.
- Changes in the market result in temporary surpluses or shortages which then cause price to change to the new equilibrium
Price mechanism: The process by which the forces of demand and supply interact to determine the price of a good or service
- Helps to clear the shortages and surpluses within the market
Adam’s Smith’s Invisible Hand
- The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium.
- Idea of “invisible hand” : forces of supply and demand, every person helps to create the best outcome for all
Shortage
- When the quantity demanded exceeds the quantity supplied
- Consumers bid among themselves for the limited goods so the price of the good increases
- Increase in price -> Contractionary movement along the demand curve and a expansionary movement along the supply the curve.
Surplus
- When the quantity supplied exceeds the quantity demanded
- Firms lower their prices to clear their excess stock