Equilibrium
Factors influencing decisions    What is a market? Demand Supply Equilibrium Excess demand   Excess supply   Shifts of demand  Shifts of supply Convergence to equilibrium  Economicstutor..com.au

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix


In every market, the forces of demand and supply will determine both prices of the product and the quantity that is likely to be supplied for a given time period.  Price and quantity will tend to move towards their 'equilibrium levels'.  In the first diagram on the right, Pe denotes 'equilibrium price' and Qe denotes 'equilibrium quantity'.  It is the equilibrium because the market is in a state of rest.  There is no pressure for price to change from this level unless there is a shift in demand or supply.


If the price in a market is not at its equilibrium level, then it is not in a state of rest and the price will either be too high (causing an excess supply of the product or a surplus) or too low (causing an excess demand or shortage of the product).  This would then result in the price converging towards its Pe level.  The amount of time this takes will depend on a number of factors, in particular the market in question.  For example, the price of grapes will quickly move towards its Pe level due to the perishability of grapes.  However, it is likely to take significantly longer in the case of more durable goods like cars, white goods, etc.


How the price converges towards equilibrium is referred to as disequilibrium analysis. When in disequilibrium, the market will either be in a state of excess supply or excess demand.




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