1.2.3.1 Interaction of supply and demand, equilibrium price and quantity

The interaction of supply and demand in a market is a fundamental concept in economics that determines the equilibrium price and quantity of a good or service. The equilibrium is the point where the quantity demanded by consumers equals the quantity supplied by producers, resulting in a stable market outcome. Let’s explore how supply and demand interact to establish the equilibrium price and quantity:

1. Demand and Supply Curves: Demand and supply are represented graphically by their respective curves. The demand curve shows the relationship between the price of a good and the quantity demanded by consumers, assuming all other factors remain constant. The demand curve typically slopes downward, indicating that as the price of a good decreases, the quantity demanded increases, and vice versa.

On the other hand, the supply curve shows the relationship between the price of a good and the quantity supplied by producers, assuming all other factors remain constant. The supply curve typically slopes upward, indicating that as the price of a good increases, the quantity supplied also increases, and vice versa.

2. Equilibrium Price: The equilibrium price is the market-clearing price, where the quantity demanded by consumers equals the quantity supplied by producers. It is the price at which there is no excess demand (shortage) or excess supply (surplus) in the market. At the equilibrium price, buyers are willing to purchase exactly the amount that sellers are willing to supply.
3. Equilibrium Quantity: The equilibrium quantity is the quantity of the good or service that is traded in the market at the equilibrium price. It represents the quantity where the quantity demanded and the quantity supplied are equal.
4. Finding Equilibrium: The equilibrium price and quantity are determined by the point of intersection between the demand and supply curves. At this point, the quantity demanded is equal to the quantity supplied.

• If the quantity demanded exceeds the quantity supplied at a particular price (excess demand or shortage), the market price tends to rise. As the price increases, the quantity supplied increases and the quantity demanded decreases, eventually leading to an equilibrium point.
• If the quantity supplied exceeds the quantity demanded at a particular price (excess supply or surplus), the market price tends to fall. As the price decreases, the quantity demanded increases and the quantity supplied decreases, eventually leading to an equilibrium point.

5. Changes in Equilibrium: Any changes in factors affecting demand or supply will shift their respective curves, leading to a new equilibrium price and quantity. For example, an increase in demand, such as due to a change in consumer preferences or higher income, will shift the demand curve to the right, resulting in a higher equilibrium price and quantity. Conversely, a decrease in demand will shift the demand curve to the left, leading to a lower equilibrium price and quantity.

Similarly, changes in supply factors, such as input costs or technology improvements, will shift the supply curve, affecting the equilibrium price and quantity accordingly.