Market equilibrium

Interaction between demand and supply of a product brings a market into being and produces its
outcomes such as price and the quantity of output. The level of output at which supply of the
commodity in the market is equal to its demand is the equilibrium level of output. The price at which
this output level is reached is the equilibrium price. At such a level of output market is said to be in
equilibrium.
An existing equilibrium would be disturbed when either market supply or market demand or both
supply and demand change. Then there will be a new equilibrium in the market, and a new equilibrium
output and a new equilibrium price.
The process of determination of price and market equilibrium is explained by bringing together the
demand and supply schedules. This is done below:

Demand and supply schedules of commodity A

Price per unit
(in Rs)
2
4
6
8
10

Quantity of market
demand (in units)
500
400
300
200
100

Quantity of market
supply (in units)
100
200
300
400
500

The data in the above table can be shown in a diagram as below:

Y
Price
12
SS
10

+E

+
DD

X
100

200

300

400

500

600

Quantity of Demand and Supply of A

From the diagram above it can be seen that market is in equilibrium when the price is Rs 6 per unit. At
this price quantity of market demand and supply are equal at 300 units each. At any other price, either
demand is more than supply or vice versa. For e.g. at price Rs 8 quantity of demand is 200 units and
supply is 400 units (as at higher price demand is less and supply is more). On the other hand, at price
Rs 4 per unit quantity of demand is 400 units and supply is 200 units (as at lower price demand is
more and supply is less).
It is only at the price of Rs 6 per unit that quantity of demand and supply become equal and the market
is in equilibrium.

Changes in equilibrium
There can be change in market equilibrium in two types of situations. They are:
1) When there is change in demand or supply
2) When there is simultaneous change in demand and supply
These two situations are discussed below in detail.
1. Change in market equilibrium when there is change in demand or supply
Change in market equilibrium due to change in demand or supply can take place in the following four
ways:
a. An increase in demand
An increase in demand, with supply remaining the same, leads to a rise in equilibrium price and also
an increase in equilibrium quantity of output. This is shown in the diagram below:
Y
Price
SS

P1

E1

DD1

DD
O

Q1

Quantity of Demand and Supply of A

b. A decrease in demand
A decrease in demand, with supply remaining the same, leads to a fall in equilibrium price and also a
decrease in equilibrium quantity of output. This is shown in the diagram below:
Y
Price
SS

P1

E1

DD
DD1
O

Q1

Quantity of Demand and Supply of A

c. An increase in supply
An increase in supply, with demand remaining the same, leads to a fall in equilibrium price and an
increase in equilibrium quantity of output. This is shown in the diagram below:
Y
Price

SS1

SS

P
P1

E
E1

DD
DD1

Q Q1
Quantity of Demand and Supply of A

d. A decrease in supply
A decrease in supply, with demand remaining the same, leads to a rise in equilibrium price and a
decrease in equilibrium quantity of output. This is shown in the diagram below:
Y
Price

SS1

SS

E1
P1
P

DD
DD1

Q1 Q
Quantity of Demand and Supply of A

2. Change in market equilibrium when there is simultaneous change in demand and supply
If demand and supply change (increase or decrease) in the same proportion, then price would remain
the same but the equilibrium output will change. This is shown the diagram below:
Y
Price

SS1

SS

E
E1

DD1

Q1
Q
Quantity of Demand and Supply

DD

On the other hand, if demand and supply change (increase or decrease) by different magnitudes, then
there will be change in both price and equilibrium quantity of output. This is shown the diagram
below:

Y
Price

SS1
E1
P1

SS

DD1

Q1
Q
Quantity of Demand and Supply

DD