Market Equilibrium the concept

We must first understand how the price mechanism determines

equilibrium in the market. Through the interplay of the forces of
supply and demand the prices of commodities in the market are
determined. Market Equilibrium is when at a certain price
level supply equals demand.

Market Equilibrium occurs at the intersection of the

supply and demand curve. At this point there is no tendency to change and the market
is happy 

Excess Demand (below market

equilibrium)
1. demand for goods exceeds supply
2. competition among buyers for limited
goods
3. firms push up prices
4. expansion in supply as it is more
profitable for firms to produce
5. contraction in demand because of
increasing prices
6. movement towards market equilibrium
where the market clears

Excess Supply (above market

equilibrium)
1. supply of goods exceeds demand
2. lack of demand cause decrease in the
price of goods
3. expansion in demand due to falling
prices
4. contraction in supply as it is less
profitable for firms to produce
5. movement towards market equilibrium
where the market clears

Changes to market equilibrium

Changes to price and quantity can be changed by any circumstances that lead to a
shift in either or both the demand and supply curve.
DEMAND
Increase in Demand
1. more of the product demanded at the old
equilibrium price
2. demand exceeds quantity supplied
3. competition forces prices to increase
4. expansion in supply as it is more profitable for
firms to produce
5. contraction in demand due to increasing prices
6. movement towards market equilibrium where
the market clears

Decrease in Demand
1. less of the product demanded at the old
equilibrium price
2. supply exceeds quantity demanded
3. lack of demand causes firms to decrease prices
4. expansion in demand due to falling prices
5. contraction in supply as it is less profitable for firms to produce
6. movement towards market equilibrium where the market clears

SUPPLY
Increase in supply
1. more is supplied at the old equilibrium
price
2. supply exceeds quantity demanded
3. lack of demand causes firms to decrease
prices
4. expansion in demand due to falling prices
5. contraction in supply as it is less profitable
for firms to produce
6. movement towards market equilibrium
where the market clears

Decrease in supply
1. less of the product supplied at the old equilibrium price
2. demand exceeds quantity supplied
3. competition forces prices to increase
4. expansion in supply as it is more profitable for firms to produce
5. contraction in demand due to increasing prices
6. movement towards market equilibrium where the market clears

NB Increase in demand has the same result to the economy as a decrease in supply.
Similarly, a decrease in demand has the same result to the economy as an increase
in supply