Definition: Market equilibrium is an economic state when the demand and supply curves intersect and suppliers produce the exact amount of goods and services consumers are willing and able to consume.
What Does Market Equilibrium Mean?
What is the definition of market equilibrium? Essentially, this is the point where quantity demanded and quantity supplied is equal at a given time and price. There is no surplus or shortage in this situation and the market would be considered stable. In other words, consumers are willing and able to purchase all of the products that suppliers are willing and able to produce. Everyone wins.
It considered a balance and is comprised of 3 properties.
- The behavior is consistent
- Each participant has no incentive to modify its behavior
- The outcome is due to some dynamic process
Although this situation rarely happens in real life, economists use this as the basis for many economic theories.
Let’s look at an example.
Example
Imagine that Steven manufactures flat screen televisions. His best seller is a 75-inches wide model. This plasma model wholesales to retailers all over the world for $3,500. Unexpectedly, new improvements to the machines that manufacture the TVs are made and faster shipping processes have been implemented. Under some circumstances this would be a good thing, but Steven wasn’t prepared and his plasma warehouse is becoming oversaturated a bit too quickly with 75-inch televisions.
The new improvements to the inputs in the market have led competitors to also offer the same size televisions. Steven is very upset because he will now have to re-evaluate how much he will have to lower his prices to account for the now excess amount of 75-inch plasma TVs that will hit the retailers.
Steven runs a few numbers and makes the decision to lower his wholesale price to $3,250 and see how they respond. He also spoke to his production team and told them to cut production down by 35% for the next month to clear out the surplus inventory. At the end of the month, Steven reviewed the numbers. The price reduction appeared to have worked. He had no unsold televisions and managed to get rid of all of the plasma TVs in his inventory.
He discovered the market equilibrium between retailers and producers for the televisions. The retailers purchased all of the TVs from Steven at his offered price leaving him without surplus or shortage. The supply was just right to meet the demand at that price point.
Summary Definition
Define Market Equilibrium: Market equilibrium means consumers’ demand and producers’ supply are equivalent.
