Market equilibrium occurs when quantity demanded equals quantity supplied at a particular price, with no inherent tendency for that price to change.
## Core Concept
Market equilibrium is the point where the demand curve intersects the supply curve. At equilibrium: - Quantity demanded (Qd) = Quantity supplied (Qs) - Price remains stable because there is no excess demand or excess supply - Both buyers and sellers have no incentive to change behaviour
This is a static concept — it describes a snapshot where market forces balance. Real markets constantly move toward equilibrium (dynamic process).
## Equilibrium Determination
Graphically: - Plot demand curve (downward sloping) and supply curve (upward sloping) - Intersection point gives equilibrium price (Pe) and equilibrium quantity (Qe)
Algebraically: - Set demand function equal to supply function - Solve for price - Substitute back to find quantity
Example: - Demand: Qd = 100 − 2P - Supply: Qs = 20 + 3P - At equilibrium: 100 − 2P = 20 + 3P - 80 = 5P → Pe = ₹16 - Qe = 100 − 2(16) = 68 units
## What Happens Away from Equilibrium
Excess Supply (P > Pe): - Quantity supplied exceeds quantity demanded - Unsold stock accumulates - Sellers reduce prices to clear inventory - Price falls back toward Pe
Excess Demand (P < Pe): - Quantity demanded exceeds quantity supplied - Shortage exists; some buyers cannot buy - Sellers raise prices to maximize revenue - Price rises toward Pe
## Shifts in Demand vs Supply & New Equilibrium
When determinants of demand or supply change (not price): - Entire curves shift - Old equilibrium no longer holds - Market adjusts to new equilibrium point
If demand increases (rightward shift): - New equilibrium: higher price AND higher quantity
If supply increases (rightward shift): - New equilibrium: lower price but higher quantity
Combined shifts require careful analysis of both curves' movements.
## Common Exam Applications
- Price control (ceiling/floor): Prevents equilibrium; creates shortage or surplus
- Tax or subsidy: Shifts supply curve; creates new equilibrium with deadweight loss
- Comparative statics: Comparing two equilibria (before and after a shock)
- Market stability: Whether equilibrium is stable (converges back) or unstable
- Welfare analysis: Consumer surplus + producer surplus maximum at equilibrium (under perfect competition)
## Common Mistakes
- Confusing movement along curves with shifts: A price change causes movement along curves, not a shift. Only non-price determinants shift curves.
- Not checking units: Ensure Qd and Qs are expressed the same way (units/month, tonnes, etc.).
- Ignoring time dimension: Short-run equilibrium differs from long-run; CA Foundation focuses on static case.
- Assuming all equilibria are stable: Some equilibria are unstable (e.g., certain cobweb models), though rarely tested at Foundation level.
- Forgetting feasibility: Negative prices or quantities have no economic meaning; discard such solutions.
## Formula / Rule
Equilibrium condition: Qd = Qs (at price = Pe)
Excess demand (shortage): Qd − Qs > 0
Excess supply (surplus): Qs − Qd > 0
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Exam tip: Focus on graphical interpretation and the logic of price adjustment. Always label axes clearly. Show both equilibrium price and quantity in your answer.