Understanding Market Equilibrium in Microeconomics

So, now that you have a clear understanding of demand and supply, in this segment, you will learn how the market determines how much of a product to make and at what price to sell it.

Market equilibrium refers to the price of a product at which the quantity supplied is equal to the quantity demanded.

Now, let's watch the upcoming video and learn more about this from Chris.

So, in the video, Chris uses an example of a bakery to help you understand that market equilibrium is represented by the point of intersection between the demand and supply curves. You also saw how this equilibrium point shifts when there is a shift in the demand and supply curves. 

To understand market equilibrium further, let’s explore this concept through another example in the next video. The example is that of the global oil market.

So, through the examples of the bakery and the oil barrel, you learnt that market forces always push the price towards the equilibrium point. This is because:

• At lower prices, there isn't enough supply to meet demand. This allows suppliers to charge a higher price for the product.
• At higher prices, there isn't enough demand. This forces suppliers to reduce prices to increase demand.
• At the equilibrium price, also called market-clearing price, the supply is exactly the same as demand. Thus, suppliers have no incentive to increase or reduce prices.

In the video, you learnt that the equilibrium shifts when there is a shift of either the demand or the supply curve. 
 

The Russia‒Saudi Arabia price war is a good example, which shows that the equilibrium price paid by consumers can be impacted by the amount of supply in the market and also by the supplier’s motivations for supplying that amount in the market. 

Additional Learning

You can refer to this simulated graph to visualise how changes in demand and supply affect the price of a product/service.