Market Equilibrium by Omkar Abhyankar

 So far in previous articles, we have looked at supply and demand as separate entities to understand each concept in depth. Supply and demand are the roots of a competitive market and understanding how supply and demand work together is important in understanding how a competitive market functions. To begin learning how supply and demand work together, let’s start off by drawing both the supply and the demand curves on one graph.

In this graph, we can see both of our demand and supply curves. The supply curve is labeled S0 and the demand curve is labeled D0 on our graph. The X axis is labeled “Quantity” as this axis represents both the quantity demanded and the quantity supplied depending on which of the two curves are being inspected. The Y axis is labeled “Price” as this axis represents the market price of a good being sold in the competitive market. Since the demand curve is downward sloping and the supply curve is upward sloping, the supply and demand curve must always intersect at some point. This point where the supply and demand curves intersect is called the “Market Equilibrium”. For a more formal definition, market equilibrium is the point at which the amount of a good supplied in a market (the quantity supplied) equals the amount of a good demanded in the market (the quantity demanded). The market equilibrium is ultimately used to determine the market price of a good in a competitive market. Let’s look back at our graph and identify the market equilibrium. We see that the supply curve intersects the demand curve at the quantity Q0 and at the price P0. This means the amount of a good supplied equals the amount of a good demanded at quantity Q0. Since both the producers and consumers are supplying and demanding respectively the same quantity of goods, the price which the producers are willing to receive and the price which the consumers are willing to pay must also be the same at this quantity Q0. This agreement in price between the producers and consumers is represented by P0 and is the market price for the good being sold in this competitive market. In the next article, we will take a look at how the market equilibrium can change through changes in the supply and demand.