Lecture: 05
MARKET EQUILIBRIUM
Definition of Market:
Set of buyers and
sellers who are in contact with each other for exchange of goods and services
at some agreed price. Market may be a particular place or a wider area where
buyers and sellers are spread (Vasser, 2014)
Definition of Market
Equilibrium:
It is the condition of a market when demand and supply of a
product are equal and a price is settled which both buyers and sellers accept.
There is no pressure to change the current price (Vasser, 2014).
Explanation:
Prices
of goods or commodities are determined by the interaction of two forces (demand
and supply). Demand has inverse relation with price as when price goes up the
quantity of goods demanded decreases. Whereas, supply has direct relation with
price in which when price goes high the quantity of goods supplied goes up as
in Fig-A and Fig-B.
It is the equality of these two forces which settles the
price of a commodity at a specific level in the market. If at any level the
quantity demanded and quantity supplied are not equal, price starts moving (up
or down). A fall in price extends demand but contracts supply.
When price
is reached a point when demand equals to supply then it is called equilibrium
of price and when supply in the market is equals to the demand in market is
called market equilibrium.
Example: A desktop computer named A1-PC is
launched with the price Rs.1,50,000/- in the market, but it is found that A1-PC
has less sell and supply is more than sufficient (i.e. 900) which needs to be
reduced and price should also be reduced in order to make product affordable
for customers. The product price then reduced to Rs.100,000/- which was not
enough because still the product is in surplus in market. Then the price
further reduced to Rs.80,000/- which reduced the surplus and reached a point
where supply and demand becomes equal indicated as 'E' in Fig-C.
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