How is market equilibrium determined in microeconomics?

Market Equilibrium in Microeconomics

Market equilibrium is the point where the quantity demanded by consumers equals the quantity supplied by producers. At this point, the market price stabilizes, and there is no tendency for it to change unless external factors shift demand or supply.

Mathematically, equilibrium occurs where:

$$ Q_d = Q_s $$

where $Q_d$ is the quantity demanded and $Q_s$ is the quantity supplied.

Worked Example

Suppose the demand and supply for a product are given by:

• Demand: $Q_d = 50 - 2P$
• Supply: $Q_s = 10 + 3P$

To find the equilibrium price ($P^*$) and quantity ($Q^*$):

Step 1: Set $Q_d = Q_s$

$$ 50 - 2P = 10 + 3P $$

Step 2: Solve for $P$

$$ 50 - 10 = 3P + 2P \\ 40 = 5P \\ P^* = \frac{40}{5} = 8 $$

Step 3: Substitute $P^*$ back into either equation to find $Q^*$

Using the demand equation:

$$ Q^* = 50 - 2(8) = 50 - 16 = 34 $$

Equilibrium:

• Price: $P^* = 8$
• Quantity: $Q^* = 34$

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Takeaways

• Market equilibrium is where quantity demanded equals quantity supplied.
• It is found by solving $Q_d = Q_s$ for price and quantity.
• Changes in demand or supply shift the equilibrium point.