Market Equilibrium

What Is Market Equilibrium?

Market equilibrium is the state of a competitive market where the quantity buyers wish to purchase exactly equals the quantity sellers wish to sell. It occurs at the equilibrium price, the price at which quantity demanded equals quantity supplied, shown graphically at the intersection of the supply and demand curves. At that point there is neither a surplus nor a shortage, so there is no pressure on the price to change and the market is said to clear. If price sits above equilibrium, a surplus of unsold goods pushes it down; if price sits below equilibrium, a shortage pushes it up. Either way, an unregulated market tends back toward equilibrium.

Why It Matters

Equilibrium is the organizing idea of microeconomics: it is where the forces of supply and demand balance and where markets settle absent outside interference. Economists use it as the benchmark for judging outcomes. At the competitive equilibrium, and with no externalities, the sum of consumer and producer surplus is maximized and the result is allocatively efficient, meaning society produces the mix of goods it most values. That benchmark is why price controls draw criticism: a binding price ceiling or floor forces the market away from equilibrium and creates persistent shortages or surpluses plus deadweight loss. Shifts in either curve move the equilibrium, letting analysts predict how events reshape prices and quantities across the economy.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What defines the equilibrium price in a competitive market?
  The price at which quantity demanded equals quantity supplied
• Where does market equilibrium appear on a standard supply-and-demand graph?
  At the intersection of the supply and demand curves
• When the market price sits above the equilibrium price, what condition results?
  A surplus, because quantity supplied exceeds quantity demanded