Overview
This lecture explains the concept of market equilibrium, using demand and supply curves to show how prices adjust when markets experience excess supply or excess demand.
Market Equilibrium
- The equilibrium point (E) is where the supply and demand curves intersect.
- At equilibrium, the quantity supplied equals the quantity demanded.
- Neither producers nor consumers have an incentive to change their behavior at equilibrium.
- Equilibrium is reached in the absence of external shocks or interference.
Excess Supply (Surplus)
- Occurs when the price is set higher than equilibrium.
- At this higher price, quantity supplied exceeds quantity demanded.
- Excess supply means producers have unsold goods.
- Producers lower prices to sell off excess goods, pushing the price toward equilibrium.
Excess Demand (Shortage)
- Occurs when the price is set lower than equilibrium.
- At this lower price, quantity demanded exceeds quantity supplied.
- Excess demand means consumers want more than is available.
- Producers raise prices, which reduces demand and increases supply, moving price toward equilibrium.
Market Adjustment Process
- Prices above equilibrium lead to downward pressure (due to surplus).
- Prices below equilibrium lead to upward pressure (due to shortage).
- These market forces ensure that the price moves toward equilibrium over time.
Key Terms & Definitions
- Equilibrium — The price and quantity where supply equals demand, and the market is stable.
- Excess Supply (Surplus) — When quantity supplied is greater than quantity demanded at a given price.
- Excess Demand (Shortage) — When quantity demanded is greater than quantity supplied at a given price.
- Market Forces — The actions by buyers and sellers that drive price adjustments toward equilibrium.
Action Items / Next Steps
- Review demand and supply curve basics if needed (as referenced in the lecture).
- Understand how market forces correct prices when not at equilibrium.