Define Market Equilibrium – Basic Comparative Static Analysis | New Topic [2024]

In this note, we are going to discuss about the Market Equilibrium and the Basic Comparative Static Analysis in Market Equilibrium. Welcome to Poly Notes Hub, a leading destination for Diploma Engineering Notes for Polytechnic Students.

Author Name: Arun Paul.

What is Market Equilibrium?

Market equilibrium occurs when the amount of goods or services supplied by producers equals the quantity demanded by consumers at a given price level. In other words, it is the point at which the forces of supply and demand in a market are balanced, resulting in neither product scarcity nor surplus.

In Market Equilibrium:

1. Quantity Supplied Equals Quantity Demanded: The quantity of goods or services that producers are willing and able to supply at a particular price corresponds to the quantity that consumers are willing and able to buy at the same price.
2. No Shortage or Surplus: There is neither excess demand (shortage), in which consumers want to buy more than what producers are offering at the given price, nor excess supply (surplus), in which producers are offering more than consumers are prepared to buy at the same price.
3. Stable Price: The price at which equilibrium is achieved is sometimes referred to as the equilibrium price or the market-clearing price. It is the price at which the market’s supply and demand curves meet.

Basic Comparative Static Analysis using a numerical example

Let’s consider a simple market for apples, where the supply and demand functions are as follows:

Supply: Q_s = 10P
Demand: Q_d = 50 – 5P

Where,

• Q_s is the quantity supplied,
• Q_d is the quantity demanded,
• P is price.

To find the equilibrium price and quantity, we set the supply equal to the demand (i.e. Q_s = Q_d) :

10P = 50 – 5P

Solving for P:

10P + 5P = 50
15P = 50
P = 50 / 15
P ≈ 3.33

Now, plug this equilibrium price back into either the supply or demand equation to find the equilibrium quantity:

Q_s = 10(3.33) ≈ 33.33
or
Q_d = 50 – 5(3.33) ≈ 33.35

So, the equilibrium price is approximately $3.33, and the equilibrium quantity is approximately 33.33 units of apples.

Now, let’s say there is an increase in consumer income, causing the demand for apples to increase by 10 units at each price level. The new demand function becomes:

New Demand: Q_d‘ = 60 – 5P

Now, we need to find the new equilibrium price and quantity. We set the new demand equal to the original supply:

10P = 60 – 5P

Solving for P:

10P + 5P = 60
15P = 60
P = 60 / 15
P = 4

Now, plug this new equilibrium price back into either the supply or demand equation to find the new equilibrium quantity:

Q_s = 10(4) = 40

So, after the increase in consumer income, the new equilibrium price is $4, and the new equilibrium quantity is 40 units of apples.