Explaining Market Equilibrium
It is essential that the concept of market equilibrium and how it is reached. Understanding the concept can help with for specific goods and services, as well as whether or not to supply those goods or services and the level to supply. To understand the concept and how it may be used it is necessary to first look at what is meant by market equilibrium, and then look at the factors which may influence the way equilibrium is reached.
In any market there will be buyers who want to purchase the goods or services, and sellers who want to supply the goods or services to the market. If there are a large amount of people that want to buy a good, but there are only a people selling a good, those who are selling the goods will be able to charge more. This is a pattern that is seen with goods when there is a shortage; one example can be seen with the way gasoline prices in the U.S. increase following major hurricanes. The retailers increased the prices as they knew that although not everyone would be able to afford the higher price, there was a surplus of buyers compared to the fuel available so they could sell the fuel at the inflated price and make more money. The converse is also true, where there are not enough potential buyers to purchase goods that are for sale in a shop, the shop will reduce the prices to try and stimulate interest and increase the number of sales. This is commonly seen in end of season sales, where it is the less popular goods that have prices reduced.
This indicates that prices will change depending on the supply and demand for the goods. In economic terms this can be represented as a graph, with two lines; one for the way demand emerges and one for the way supply emerges. The the way demand will manifest; the usual pattern is that as the price of a good increases less people will want to buy it, this decrease the demand (Gillespie, 2010). If shown on a graph, the line representing the demand will show that when the price is high there will only be a low quality of goods demanded, but as the price decreases the quantity that people want to buy will increase. The line representing supply will show the opposite; when the price for a particular good is low the suppliers are less likely to be attracted to selling that good compared to when the price is high and there is an increased potential for a . If the two lines are placed on a graph they will intersect, the point at which they intersect is the point of equilibrium, where the supply equals the demand. This is shown in figure 1. Point ‘P’, where the lines cross is the point of equilibrium and indicates the price.
Figure 1; Supply and the point of equilibrium
The angle of the lines will vary depending on the goods, as the rate at which the supply or demand will change will vary on the nature of the product. Where there are essential goods such as gasoline or electrify the rate of change is likely to be more gradual compared to non-essential goods such as champagne.
The point of equilibrium will change depending on market conditions. Where