so before I get into this video I'm going to assume that you guys understand the demand curve supply curve price and quantity and have a general understanding of this graph and if not I'm gonna pull link in the description to a video where I explain the basics general you know analysis behind this graph and what it would all means so today we're going to look at the equilibrium point right here labeled e this is our equilibrium and what we mean by equilibrium it's the point where market forces are balanced in such a way that this is where we're going to end up in the long-run as you can see it's where demand and supply equal and at this point producers and consumers have no incentive to deviate from here we're going to demonstrate exactly why this is the case by looking at examples where we're not at E throughout the video and another important point to remember is this is absent of any external factors or any shocks so in order to understand why we end up at this point here equilibrium I'm gonna look at the case or the cases of where we are not at this point so that for example might be up here or down here so we're gonna start off by looking at when we're up here and the price is much higher than our equilibria so let's start here at this price which corresponds to this quantity supplied qsr and this quantity demanded QD which is this price here as we can see in this situation the quantity supplied is much greater than the quantity demanded this means that we're in a position that we're going to call excess supply what is occurring when we're you know in a position of excess supply in the market is that there is too much of the good on the market and on of demand so in other words producers have produced too much of the good and not enough people want to buy it so in this case we'll call this area here our excess supply excess supply what happens when there's too much are we good on the market and on enough people want to buy it well in order to get rid of this excess supply the producers have to lower the price in order to increase demand and get rid of this excess supply of the good that they have they need to increase demand in some way and so what they do is they lower the price of the good so what happens when when excess supply is that the forces start to work in such a way where our price started to get pushed down here because our price is now falling because the producers have to reduce the price in order to increase demand and get rid of all this excess supply this on the market so we now have forces pushing us down so we know that we're not going to end up in a stable position here where the price is much higher than our point here so now we know why we're not going to be in a stable position when we are up here and our price is higher up here than the equilibrium point because in that case we're gonna be in excess supply and forces are gonna push the price down so now let's look at the situation where we're not at our equilibrium but instead of being up here we're down here so our price is here which corresponds to this quantity demanded and this quantity supplied as we can see when the price is low here that the quantity demanded is much higher than the quantity supplied so QD your quantity demanded exceeds quantity supplied so in this case we are in a situation we call excess demand the complete opposite of the situation where we were in excess supply so when we ran excess demand what's happening is too many people to buy the good the price is so low that so many people want to buy the good but not enough producers want to produce the good because you know they can't sell it for a high price and so on so in this case when too many people want it and not enough producers are willing to produce it we have access demand which we're gonna call this area here excess demand gonna call it IDI and this should go all the way up to here these two points here this is our excess demand this is the area where quantity supplied quantity demanded exceeds quantity supplied and this is by how much from here to here so when too many people want to buy the good and not enough producers are willing to produce it what happens is the price starts to increase in order to get rid of this excess demand there's too much demand the producers start to increase the price and this reduces the demand as we knew from previous video so what happens is when when excess demand and when our price is here much lower than our equilibrium point the forces then start to push up the price because the producers in an attempt to get rid of this excess demand start to increase the price so now we start moving back up here again towards our equilibrium point so now we know why price being here much lower than our equilibrium is again unstable now that we've looked at the case of excess demand down here where our price is below the equilibrium point and Aiko says supply here where price is above the equilibrium point and now that we've understood why both these situations are not stable we have thus proved at this point here e is where our market forces are balanced in such a way that this is where we're going to end up under the natural circumstances and absent of any external factors or shocks so this is our aqua Librium and that is how we end up here