Market equilibrium
Market equilibrium: when the quantity demanded is equal to the quantity supplied.
This occurs when the plans of the households (buyers, demanders) coincide with the plans of the
firms (sellers, suppliers). The price at which this occurs is called the equilibrium price.
At any other price there will be disequilibrium, in the form of excess supply or excess demand.
When there is disequilibrium, forces are set in motion to move the market towards equilibrium.
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When the quantity demanded > quantity supplied, there is excess demand (or a market
shortage) at that particular price.
When the quantity supplied > quantity demanded, there is excess supply (or a market
surplus) at that particular price.
When the quantity demanded = quantity supplied, there is equilibrium in the market.
Equilibrium is a state of rest in which opposing forces are balanced and in which there is no
tendency for things to change (as long as the underlying forces remain unchanged).
© Bishops Economics Department
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In the table and in the diagram we see that the quantity demanded > quantity supplied (ie
that there is excess demand) at all prices lower than R5 per kg.
o For example, at a price of R2 per kg 320 kg are demanded, while only 50 kg are
supplied.
o The excess demand (or market shortage) of 270 kg is indicated by bc.
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At all prices higher than R5 per kg the quantity supplied > quantity demanded (ie there is
an excess supply or surplus).
o For example, at a price of R7 per kg only 120 kg are demanded, while 300 kg are
supplied.
o The excess supply (or market surplus) of 180 kg is indicated by df.
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When there is excess demand (ie a market shortage), firms sell their total production but
households do not obtain the quantity of the product which they would like to buy at that
particular price. In an effort to obtain a greater quantity of the product, households bid up
the price of the product (ie they offer to pay more for the product), while the firms realise
that they can charge a higher price.
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As the price rises, the quantity supplied increases along the supply curve – existing firms
produce more – while the quantity demanded falls along the demand curve.
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This process continues until equilibrium is reached, where the quantity demanded is equal
to the quantity supplied (at a price of R5).
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When there is excess supply (ie a market surplus), firms find that they cannot sell all their
products – they are left with unsold stocks (also called inventories) of the product. They cut
their production and compete with each other to find buyers for their products by reducing
the price.
© Bishops Economics Department
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This results in a fall in the quantity supplied along the supply curve. Some existing firms
produce less. At the same time the falling price raises the quantity demanded along the
demand curve.
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This process continues until equilibrium is reached, where the quantity demanded is equal
to the quantity supplied (at a price of R5).
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Once equilibrium is reached, no further change will occur (as long as the underlying forces
remain the same).
Consumer surplus and producer surplus
The equilibrium or market-clearing price is determined by the interaction between demand and
supply.
With a normal, downward- sloping demand curve and a normal, upward-sloping supply curve, the
uniform market price implies that some consumers are paying less than the maximum they are
willing to pay, while certain suppliers are receiving more than the minimum they were willing to
accept. We refer to this as consumer and producer surplus
Consumer surplus
Consumer surplus: the difference between what consumers actually pay and the value that they
receive, indicated by the maximum amount they are willing to pay.
In the diagram above…
 The demand curve indicates the highest prices that consumers are willing and able to pay
for different quantities of the good.
© Bishops Economics Department
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If the market price is P1 the consumers pay that price for each of the units purchased.
This is less than the highest prices they are prepared to pay for all of the units purchased
except the last one.
For every quantity between zero and Q1, consumers therefore pay less than they are
prepared to pay.
The total amount gained in this way by the consumers is indicated by the shaded. This is
called the consumer surplus.
Producer surplus
Producer surplus: the difference between what producers actually receive and the amount that
they are willing to sell their products at.
Producer surplus: the difference between what producers actually receive and the amount that
they are willing to sell their products at.
In the diagram above…
 The supply curve SS indicates the different quantities that producers are willing to supply
at different prices.
 With a uniform market price P1 and an equilibrium quantity Q1, it implies that up to Q1
there is a positive difference between the lowest prices at which producers are willing to
supply the different quantities and the price they actually receive.
 This is indicated by the shaded area and is the total gain to producers known as producer
surplus.
© Bishops Economics Department
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