THE CONCEPT OF EQUILIBRIUM What is equilibrium? Equilibrium is a situation which occurs when there is a balance between quantity demanded and supplied. It represents a situation where there is no tendency to change.
The price which equates demand with supply is equal to equilibrium price. The existence of equilibrium price gives rise to the third law of demand and
supply which states that: “The equilibrium price
However, a temporary deviation either in the form of shortage or surplus has to be corrected by forces of demand and supply, which are capable of restoring equilibrium to its normal position. Changes in demand and supply lead to price changes.
Once there is a change in either demand or supply, the initial equilibrium will be disrupted and a new equilibrium will be created.
Possible causes to Changes in equilibrium
Changes in equilibrium are caused by the same factors that cause changes in demand and supply. They include:
- Increase in demand: If the demand for a commodity increases while supply remains constant, there will be an excess demand over supply. This will lead to an increase in the equilibrium price of the commodity as well as an increase in the equilibrium quantity.
There is a shift in the demand curve to the right due to increase in demand. It shifted from D1D1 to D2D2 and the price increased from P1 to P2, the new equilibrium position is at the price P2 and quantity Q2.
(2) Decrease in demand: If the demand for a commodity decreases while supply remains
constant there will be an excess of supply over demand. This results in decrease in the equilibrium price and quantity of the commodity.
with a decrease in demand, the demand curve shifts to the left from D1D1 to D2D2 and price decreases from P3 to P2. The new equilibrium position is at the price of P2 and quantity Q3.
Note: The increase and decrease in demand as explain above give rise to the fourth law of demand and supply, which states that “An increase in demand will cause an increase in both the equilibrium price and quantity supplied, while a decrease in demand will cause both the equilibrium price and the quantity supplied to fall.
- Increase in supply: If supply increases while demand remains constant, there will be an excess of supply over demand. This will bring about a decrease in the equilibrium price of the commodity and an increase in the equilibrium quantity.
an increase in supply makes the curve to shift to the right from S1S1 to I the price to fall from P2 to P1. Here, equilibrium position is at the price P1 quantity Q2.
- Decrease in supply: A decrease in supply without any change in demand will lead i excess of demand over supply making the equilibrium price to increase and a decrease in equilibrium quantity.
the supply curve shifts to the left from S1S1 to S2S2. The price increases from P1 to P2. The new equilibrium position is at the price P2 and quantity Q1.
Note: The increase and decrease in supply as explained above give rise to the fifth law of demand and supply, which states that: “An increase in the supply of a commodity will cause the equilibrium price to fall and the quantity demanded to increase, while a decrease in supply will cause the equilibrium price to rise but the quantity demanded to fall.”