Market Balance: Demand and Supply Equilibrium (B)
What is relationship between demand and supply? What is the law of demand and supply?
Posted: Oct 2009
Equilibrium price is the price that equates the amount requested and offered. In equilibrium price, quantity of goods that buyers are willing and able to buy fully coincides with the amount that sellers are ready and able to sell. Customers bought everything they wanted to buy and the sellers have sold everything they wanted to sell.
Still, the equilibrium does not occur so often in the market. Due to different factors. the following situation may occur on the market.
Market price is higher than the equilibrium price
When the market price is higher than equilibrium price, then the amount of product offered is higher than the requested amount. There is excessive or surplus offer ( sellers are unable to sell all they want at current price ).Therefore, sellers are lowering the price, what causes the increase of demand, and reduces the amount offered, so the market gradually returns to equilibrium.
Market price is lower than the equilibrium price
When the market price is lower than equilibrium price, then the required amount of product is lower than the amount offered. There is excessive demand or lack of product ( customers are unable to buy what they want at the current price level ). Sellers will increase prices, decreasing the amount requested, amount offered is growing, and the market shifts again to the balance.
The law of Supply and Demand says:
Cost of each product is adapting, in order to bring offered and required amount of goods into the balance.
Surpluses and deficits are temporary because prices adapt to equilibrium conditions.
In order to analyze how an event affects the market, we do so in three stages:
1.) First, determine whether the event shifts demand curve, supply curve or both curves
2.) Second, determine whether the curve shifts to the right or left
3.) Third, with the help of supply and demand chart compares the original and the new balance.