Hi, I'm Scott Wolla, and today I'm talking
about market equilibrium. In a market economy like the United States,
the choices that individual consumers and producers make every day determine how society's
scarce resources will be used. Consumer and producer choices determine what
and how much will be produced, and at what price. These choices create the market forces of
supply and demand. Let's review the basics of supply and demand,
and then we will discuss market equilibrium. Law of Demand: Quantity demanded is the amount
of a good that buyers are willing and able to purchase at a particular price. Many things determine demand, but only price
can determine the quantity demanded of a specific good. The law of demand states that - other things
being equal - when the price of a good rises, the quantity demanded of that good falls. The reverse is also true - when the price
of a good falls, the quantity demanded of that good rises. Economists refer to the relationship between
price and quantity demanded as the law of demand. The combination of the quantities people are
willing and able to buy of a good or service at various prices constitutes a demand schedule. When the demand schedule is graphed, the demand
curve is downward sloping. Law of Supply Now, we need to look at the other side of
the market and examine the sellers or producers. The quantity supplied of any good or service
is the amount of a good that sellers are willing and able to sell at a particular price. Many factors affect supply, but only price
can determine the quantity supplied. When the price of a good rises, the quantity
supplied of that good will increase. The reverse is also true: if the price of
a good decreases, the quantity supplied of that good will decrease. Economists refer to the relationship between
price and the quantity supplied as the law of supply. The combination of the quantities producers
are willing to produce and sell at various prices constitutes a supply schedule. When the supply schedule is graphed, the supply
curve is upward sloping. Equilibrium So, is it supply or demand that determines
the market price? The answer is 'both.' Like the two blades of a scissors, supply
and demand work together to determine price. When you combine the supply and demand curves,
there is a point where they intersect - this point is called the market equilibrium. The price at this intersection is the equilibrium
price, and the quantity is the equilibrium quantity. At the equilibrium price, there is no shortage
or surplus. The quantity of the good that buyers are willing
to buy equals the quantity that sellers are willing to sell. Buyers can buy the quantity they want to buy
at the market price, and sellers can sell the quantity they want to sell at the market
price. So, is equilibrium a constant, unchanging
point? No. Markets do have a natural tendency to settle
at the equilibrium price, but the price may bounce around a bit in the process. Think of a deep bowl with steep sides. Now, put a marble in the bowl and turn the
bowl in circles. The marble in the bowl will roll around the
sides of the bowl, but as it rolls, gravity will pull it toward the bottom. As you slow the turning motion, the marble
will drop to the bottom. In a similar way, prices also roll around
as the forces of supply and demand change, but they tend toward, and eventually settle
at, equilibrium. Imagine a market in transition, where the
demand for widgets has suddenly decreased, but market price has not yet settled to the
new equilibrium. Suppliers will continue to respond to the
market price - which is now too high - while consumers have decreased the quantity they
demand. This means that suppliers will produce a greater
quantity than consumers are willing to purchase, resulting in a surplus. The surplus puts downward pressure on the
market price, which causes it to drop back toward the equilibrium price. Now, imagine the demand for widgets has increased,
but the market price has not yet risen to the new, higher equilibrium price. Suppliers will continue to respond to the
market price - which is now too low - while consumers have increased the quantity they
demand. This means that sellers will supply a smaller
quantity of goods than buyers are willing to purchase, resulting in a shortage. Buyers will respond by bidding up the price,
and before you know it, the price is rising toward the equilibrium point. Well, that's all the time we have for today. Be sure to listen to Episode 8 of our audio
podcast series to learn even more about market equilibrium. Thanks for watching.