[Commerce Class Notes] on Market Equilibrium Pdf for Exam

A market can be defined as the particular things sold in an area. So, for example, we can talk here about : 

• The eggs market in Nashville, Tennessee in April of 2016.

• The rolled aluminum market in the U.S. in 2015.

• Also, the market for radiological diagnostic services worldwide in the last decade also emerged as a market.

So in describing a market there should be the presence of sellers and buyers. A market is a place where buyers and sellers exchange their things.

When we study economics then the market emerges as an important concept. For example, we can discuss the market for mango juice and can ignore the time and place in order to keep things simple. We can also just say that we are looking for jeans in the market of Mumbai.  However here the difficulty is that we can lose the important things which are essential to describe a market.

Assumptions of Market

The six most important assumptions for a market will be :

• A market is known for a single type of good or service.

• All of the goods or services bought and sold in a market are identical.

• In a single Market, The goods or services sell for a single price.

• All consumers should have enough knowledge about the product.

• Many of the buyers and sellers have good relations between them.

•  The costs and benefits of a transaction will be acquired only by buyers and sellers.

These assumptions are easy to understand. They guarantee that the buyers who value the good more than it costs will find a customer. 

In other words, there are no transactions that don’t happen because of the less information to the buyers or sellers.

These assumptions can also be true definitions to define an ideal market. But in reality, it is difficult to find such a market as all of the markets are not like this. We will also discuss what will happen if these conditions fail to hold.

Market Equilibrium

Market equilibrium is the condition where the production by the sellers and the demand of that product by the buyer becomes equal. We can find the equilibrium price by putting the demand equal to the demand. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. 

The demand curve is the curve that depicts the quantity demanded at any price while the supply curve depicts the quantity supplied at any price. So there is one price on the graph that they have in common, which is at the intersection of the two curves.

The equilibrium price is the intersection of the demand curve and supply curve. We can also derive it mathematically. 

Market Equilibrium Graph

Consider a demand curve for a headphone that is described by the following function:

QD = 1800 – 20P

Note that in general while drawing graphs of functions, draw with the independent variable on the horizontal axis and the dependent variable on the vertical axis. In the case of supply and demand curves,  we always draw the quantity on the horizontal axis and price on the vertical axis. Because of this, it is easier to draw the demand relationship as an inverse demand curve. Here the demand curve is expressed as a function of quantity, that is price. So, In our example this would be:

P = 90 – 0.05QD

This is the original demand curve solved for P instead of QD. In the inverse demand curve, the vertical intercept is easy to see from the equation: demand for television stops at the price of $90. No customer is willing to pay more than $90 for headphones.

Similarly, we can also represent the supply curve as a mathematical function. For example, consider the supply curve described here :

 

QS = 50P – 1000

As we depicted it as a demand curve, we can also depict it as an inverse supply curve.

The supply curve is expressed as price as a function of the quantity of the product. In this case, the inverse supply curve is derived from the following equation:

P = 20 – 0.03QS

Here the vertical intercept, $20, gives us the minimum price to get a seller to sell his television. At prices of $20 or less, supply would not be possible. So from here, we can conclude that the equilibrium price should be between $20 and $90.

To find equilibrium price and quantity is simply, we have to set only QD = QS and solve. We have to find the price that makes this equality happen. In our example, setting QD = QS yields:

1800 – 20P = 50P – 1000

or

70P = 2800

or

P = $40

At P = $40, the quantity demanded at the demand curve would be: 

QD = 1800 – 20(40) = 1000

Similarly, At P = $40, the quantity supplied at the supply curve would be:

QS = 50(40) – 1000 = 1000.