Supply, Demand and Equilibrium
What is the Market Equilibrium?
When quantity demanded equals quantity supplied, the market is said to be in equilibrium. At this point, the price of the good is known as the clearance price, as it is the perfectly balanced market value of the goods that ensures producers make the right amount for a price that consumers are willing to pay.
As discussed in the 'Law of Demand and Supply' modules previously, it is crucial to note that only non-price factors can cause a shift in the supply or demand curve (a change in price will move along the curve.)
If there is a shift in the curve that raises the price above the equilibirum price of the market, then the market will be disequilibrium. This occurs when demand doesn't equal supply. This means that the price is either set too high or too far below the clearance price causing a surplus or shortage of goods.
The Price Mechanism
As all markets are interconnected, a change in price, demand or supply of one good may effect the equilibrium price of another good. Therefore, shifts in demand can be derived from other products. Most notably the following are obvious examples of how price changes can affect interconnected markets.
Substitute goods: These goods have an inverse relationship. This means as demand for Good A rises, there will be a fall in demand for Good B.
Compliments: These goods have the opposite effect, as when demand rises for Good A, demand for Good B will also rise.
Incomes: This means a change in household income, will effect the demand for certain types of goods.
Derived Demand: This refers to how a change in demand for a goods will have a direct effect on the demand for resources required to make the good.
(Tips: These are common multiple choice questions in exams.)