Supply and Demand Equilibrium

By Jodi Beggs, About.com Guide

Even though there is no central authority governing the behavior of markets, the individual incentives of consumers and producers drive markets toward their equilibrium prices and quantities. To see this, consider what happens if the price in a market is something other than the equilibrium price P*.

If the price in a market is lower than P*, the quantity demanded by consumers will be larger than the quantity supplied by producers. A shortage will therefore result, and the size of the shortage is given by the quantity demanded at that price minus the quantity supplied at that price. Producers will notice this shortage, and the next time they have the opportunity to make production decisions they will increase their output quantity and set a higher price for their products. As long as a shortage remains, producers will continue to adjust in this way, bringing the market to the equilibrium price and quantity at the intersection of supply and demand.

Previous

• Supply and Demand Equilibrium
• Market Forces Result in Economic Equilibrium
• Market Forces Result in Economic Equilibrium
• Only One Price in a Market Is Sustainable
• The Condition for Market Equilibrium
• Markets Are Not Always in Equilibrium

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