Market equilibrium

Market equilibrium is the state in which the quantity of a good or service demanded by buyers equals the quantity supplied by sellers at a particular price, resulting in no inherent tendency for prices or quantities to change (Mankiw N.G. 2021, p.77)^[1]. At $3 per pound, consumers want to buy 10,000 pounds of apples. At $3 per pound, farmers want to sell 10,000 pounds. Those intentions match perfectly—that's equilibrium. No buyer goes home empty-handed, no seller sits with unsold inventory. The market clears.

The concept is foundational to economics. Alfred Marshall's 1890 supply and demand scissors diagram—showing equilibrium where the curves cross—remains one of the most recognized images in the social sciences. Markets don't always reach equilibrium instantly, and real-world complications abound, but the gravitational pull toward equilibrium explains much about how prices form and resources allocate.

Finding equilibrium

Equilibrium occurs where supply equals demand:

The intersection

Graphical representation. Plot quantity on the horizontal axis, price on the vertical. The demand curve slopes downward (higher prices mean less demand). The supply curve slopes upward (higher prices encourage more supply). They intersect at exactly one point^[2].

Equilibrium price. The price coordinate of the intersection—the only price at which quantity demanded equals quantity supplied.

Equilibrium quantity. The quantity coordinate of the intersection—how much actually trades at the equilibrium price.

Mathematical determination

Setting equations equal. Given a demand function Qd = 100 - 2P and supply function Qs = 20 + 3P, equilibrium requires Qd = Qs. Solving: 100 - 2P = 20 + 3P yields P = 16. Substituting back gives Q = 68.

The market mechanism

Markets move toward equilibrium:

Surplus

Price above equilibrium. When price exceeds equilibrium, quantity supplied exceeds quantity demanded. Sellers can't sell everything they produce—inventory accumulates^[3].

Downward pressure. Sellers with unsold goods cut prices to attract buyers. Lower prices reduce supply and increase demand until equilibrium is reached.

Example. If apartments rent for $2,000 but equilibrium is $1,500, vacancies accumulate. Landlords eventually lower rents to fill units.

Shortage

Price below equilibrium. When price is below equilibrium, quantity demanded exceeds quantity supplied. Buyers can't find enough product—they leave empty-handed.

Upward pressure. Buyers compete for scarce goods, bidding prices up. Higher prices reduce demand and increase supply until equilibrium is reached.

Example. Concert tickets priced at $100 when equilibrium is $300 sell out instantly. The secondary market emerges with higher prices^[4].

Stability

Gravitational force. Market forces push prices toward equilibrium from either direction. Equilibrium is stable because deviations self-correct.

Speed of adjustment. How quickly markets equilibrate varies. Financial markets adjust in milliseconds. Housing markets may take months or years.

Shifts in equilibrium

Changes in supply or demand shift equilibrium:

Demand shifts

Increase in demand. If income rises, preferences change, or substitutes become expensive, the demand curve shifts right. Both equilibrium price and quantity increase.

Decrease in demand. If tastes shift away from a product or complements become expensive, demand shifts left. Both price and quantity fall^[5].

Example. Pandemic-driven demand for home office equipment shifted demand right, raising prices and quantities sold.

Supply shifts

Increase in supply. Technological improvement, lower input costs, or new entrants shift supply right. Price falls while quantity rises.

Decrease in supply. Natural disasters, regulatory costs, or input shortages shift supply left. Price rises while quantity falls.

Example. Drought reduces wheat supply, shifting supply left. Wheat prices rise; quantities traded fall^[6].

Simultaneous shifts

Both curves move. When supply and demand shift simultaneously, the effect on either price or quantity becomes ambiguous depending on relative magnitudes.

Analysis requires specifics. If demand increases more than supply increases, price rises. If supply increases more, price falls. Only comparison of shift magnitudes resolves the ambiguity.

Special cases

Some markets complicate the basic model:

Price floors

Minimum price above equilibrium. Minimum wage laws, agricultural price supports, and rent minimums set prices above market equilibrium. Result: persistent surplus (unemployment, crop stockpiles, excess supply)^[7].

Non-binding floors. If the floor is below equilibrium, it has no effect—the market clears at the higher equilibrium price anyway.

Price ceilings

Maximum price below equilibrium. Rent control, price gouging laws, and interest rate caps set prices below equilibrium. Result: persistent shortage (housing shortages, empty shelves, credit rationing).

Consequences. Below-equilibrium prices reduce supply, increase demand, and require non-price rationing (queuing, favoritism, black markets).

Disequilibrium persistence

Sticky prices. Some prices adjust slowly due to contracts, menu costs, or fairness concerns. Labor markets are notoriously sticky—wages rarely fall even when unemployment is high.

Market failures. Information asymmetry, externalities, and market power can prevent markets from reaching efficient equilibrium^[8].

Equilibrium and efficiency

Competitive equilibrium has efficiency properties:

Consumer and producer surplus. At equilibrium, total surplus (the sum of consumer and producer benefits from trade) is maximized.

Deadweight loss. Prices away from equilibrium reduce total surplus. Price floors create surplus and deadweight loss. Price ceilings create shortages and deadweight loss.

First welfare theorem. Under certain conditions, competitive equilibria are Pareto efficient—no reallocation can make anyone better off without making someone worse off.

Market equilibrium — recommended articles

Supply and demand — Price theory — Microeconomics — Market structure

References

• Mankiw N.G. (2021), Principles of Economics, 9th Edition, Cengage.
• Krugman P., Wells R. (2018), Microeconomics, 5th Edition, Worth Publishers.
• OpenStax (2023), Principles of Economics.
• Khan Academy (2023), Market Equilibrium Tutorial.

Footnotes

1. ↑ Mankiw N.G. (2021), Principles of Economics, p.77
2. ↑ Krugman P., Wells R. (2018), Microeconomics, pp.67-78
3. ↑ OpenStax (2023), Principles of Economics, Chapter 3
4. ↑ Khan Academy (2023), Market Equilibrium Tutorial
5. ↑ Mankiw N.G. (2021), Principles of Economics, pp.89-102
6. ↑ Krugman P., Wells R. (2018), Microeconomics, pp.89-104
7. ↑ OpenStax (2023), Price Controls and Equilibrium
8. ↑ Mankiw N.G. (2021), Principles of Economics, pp.112-124

Author: Sławomir Wawak