Equilibrium

Summary and Introduction to Equilibrium

So far, we've looked at supply, we've looked at demand, and the main question that now arises is, "How do these two opposing forces of supply and demand shape the market?" Buyers want to buy as many goods as possible, as cheaply as possible. Sellers want to sell as many goods as possible, at the highest price possible. Obviously, they can't both have their way. How can we figure out what the price will be, and how many goods will be sold? In most cases, supply and demand reach some sort of compromise on the price and quantity of goods sold: the market price is the price at which buyers are willing to buy the same number of goods that sellers are willing to sell. This point is called market equilibrium. Because supply and demand can shift and change, equilibrium in a standard market is also fluid, responding to changes in either market force. There are, however, some cases in which the normal fluidity of equilibrium does not exist, whether due to the structure of the market or inefficiencies within the market. We will examine some of these cases, such as monopolies or markets with government intervention, which are not "traditional" market economies.

In this unit, we will learn how to find market equilibrium to determine the prices and quantities of goods sold, we will calculate firms' profit margins, and we will study ways in which a market can deviate from this traditional market model.