Economic equilibrium is a state where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change.
Price is above market equilibrium
Surplus. Higher supply than demand.
Equilibrium price falls
Equilibrium qty rises
Happens if new tech released or new firm enters market
Price below market equilibrium
Shortage. Higher demand than supply.
Equilibrium Price rises
Equilibrium qty falls
Demand curve shifts to the right
Maybe because incomes have increased or population has grown.
Effect of an increase in supply / surplus
Key equilibrium terms
In a competitive equilibrium, supply equals demand.
Ceteris Paribius 'all else being equal'
Requires that when analysing the relationship between two variables all else must be held constant.
A condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services offered by sellers.
Competitive market equilibrium
A market equilibrium with many buyers and many sellers
Qty supplied > qty demanded. Price is above equilibrium.
Qty supplied < qty demanded. Price is below equilibrium
Effect of an increase in demand / shortage
Properties of equilibrium
Three basic properties of equilibrium in general proposed by Huw Dixon:
The behavior of agents is consistent.
No agent has an incentive to change its behavior
Equilibrium is the outcome of some dynamic process (stability).
Complementary goods: price change of one effects quantity demanded of the other.
Price increasing on complimentary
Price decreasing on complimentary