Short run equilibrium

From CEOpedia | Management online

Equilibrium is a situation when the quantity supplied equals the quantity demanded at the current price. It is one of the three conditions that prevail in every market. At equilibrium, no tendency for price to change exists. Remaining are (Case K. E., Fair R. C., Oster S. M., 2012, p. 66):

  • excess demand - the quantity demanded exceeds the quantity supplied at the current price,
  • excess supply - the quantity supplied exceeds the quantity demanded at the current price.

The quantity demanded is the amount of a good that buyers are willing and able to purchase. Law of demand is the claim that other things equal, the quantity demanded of a good falls when the price of the good rises (Mankiw N. G., 2009, p. 67).

The quantity supplied of any good or service is the amount that sellers are willing and able to sell. The law of supply is the claim that other things equal, the quantity supplied of a good rises when the price of the good rises (Mankiw N. G., 2009, p. 73).

According to the Dictionary of economics, equilibrium is a state of balance such that a set of selected interrelated variables has no inherent tendency to change. Equilibrium can exist for an economy as a whole, for a sector of it, for a particular market or for an institution, such as a firm. The Marshallian and Keynesian cross diagrams are the most famous schematic representations of equilibrium (Rutherford D., 2002).

Fig.1 Equilibrium (source: Mankiw N. G., 2009, p. 77)

Example

Based on the example presented in Chapter 4 of the Microeconomics Principles, it can be determined the relationship between price and quantity supplied (Mankiw N. G., 2009, p. 67, p. 73, p. 77):

  • There are many determinants of quantity supplied, but price plays a special role. When the price of ice cream is high, selling them is financially rewarding, and so the quantity supplied is large. Sellers of ice cream work long hours, hire a lot of workers and also buy many ice-cream machines. Sellers produce less ice cream when the price of ice cream is low because the business is less profitable. At a low price, some sellers may even choose to shut down, and their quantity supplied falls to zero. The law of supply applies here: other things equal, when the price of good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well.
  • The example shows how many ice-cream cones Catherine buys each month at different prices of ice cream. If ice cream is free, Catherine eats 12 cones per month. At $0.50 per cone, Catherine buys 10 cones each month. At $1.00 she purchases 8, at $1.50-6, at $2.00-4, at $2.50-2. As the price rises further, she buys fewer and fewer cones. When the price reaches $3.00, she doesn't buy any ice cream at all. This shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much consumers of the good want to buy.
  • The quantity of ice-cream cones supplied each month by Ben, an ice-cream seller, at various prices of ice cream. At a price below $1.00, Ben does not supply any ice cream at all. At a price of $1.00 he supplies 1 cone, at $1.50-2, at $2.00-3, at $ 2.50-4 and finally at $3.00 he supplies 5 cones. The supply curve slopes upward because, other things equal, a higher price means a greater quantity supplied.
  • The point at which the supply and demand curves intersect is called the market's equilibrium. The price at this overcut is called the equilibrium price, and the quantity is called the equilibrium quantity.

Here the equilibrium price is $2.00 per cone, and the equilibrium quantity is 7 ice cream cones.

Advantages of Short run equilibrium

An equilibrium is a situation where the quantity of goods supplied is equal to the quantity demanded at the current price. There are a number of advantages to this condition in the short run, including:

  • Increased efficiency in the market, as there is no tendency for the price to change. This allows for a more efficient distribution of resources and a better allocation of production and consumption activities.
  • Stable prices, as equilibrium prevents any large fluctuations in either direction. This reduces the uncertainty and risk associated with operating in markets.
  • Increased consumer satisfaction, as the market is able to provide a consistent supply of goods and services at a stable price.
  • Enhanced competition in the market, as firms are able to compete on price and quality, leading to higher quality and lower prices for consumers.
  • Reduced costs for businesses, as there is no need to invest in large amounts of stock to hedge against price fluctuations.

Limitations of Short run equilibrium

Equilibrium is an important concept in economics, as it represents a state of balance in a marketplace. However, there are certain limitations to the concept of short-run equilibrium. These include:

  • Limited availability of resources: In a short-run equilibrium, the resources used to supply goods and services are limited. This means that any increases in demand may not be able to be met, leading to an increase in prices.
  • Price fluctuations: The prices of goods and services in a short-run equilibrium can be subject to significant fluctuations due to changes in demand. This can lead to instability in the marketplace, which can be difficult to predict.
  • Limited knowledge: In the short-run, it is difficult to accurately predict the demand for goods and services due to the limited knowledge of the market. This can lead to unexpected changes in the market, which can affect the equilibrium.
  • Long-term effects: Short-run equilibrium does not take into account the long-term effects of changes in demand on the marketplace. This means that the effects of changes in demand may not be accurately predicted in the short-term.

Other approaches related to Short run equilibrium

The list below outlines other approaches related to short run equilibrium:

  • Graphical approach: This approach uses diagrams to depict the equilibrium of a given market. It illustrates the quantity being supplied and demanded, and the resulting equilibrium price and quantity.
  • Mathematical approach: This approach involves finding the equilibrium price and quantity through mathematical equations, such as the demand and supply equation.
  • Analytical approach: This approach uses economic theory to analyze the equilibrium of a given market. It is commonly used to explain why markets behave the way they do.
  • Behavioral approach: This approach examines how the behavior of consumers and producers affects the equilibrium of a market. It is useful for understanding how changes in behavior can affect the market equilibrium.

In summary, the different approaches to short run equilibrium include graphical, mathematical, analytical, and behavioral methods. Each approach offers a unique way of understanding how a market’s equilibrium is determined.


Short run equilibrium — recommended articles
Monopson — Price-Taker — Market dynamics — Market structure — Baumol model — Law of supply and demand — Change In Supply — Marginal pricing — Price taker

References

Author: Natalia Supernak

Retrieved from "https://ceopedia.org/index.php?title=Short_run_equilibrium&oldid=96739"