Market equilibrium is a condition in a market in which buyers’ and sellers’ intended transactions are mutually compatible. In the standard competitive model of supply and demand, it occurs at a price where quantity demanded equals quantity supplied. This determines an equilibrium price and an equilibrium quantity, with neither excess demand nor excess supply. Equilibrium describes consistency within an economic model; it does not by itself establish that an outcome is fair or socially desirable. (openstax.org)
The competitive model
In microeconomics, demand represents the quantities buyers are willing and able to purchase at different prices, while supply represents the quantities sellers are willing and able to offer. Both refer to a specified product, market, and period. Holding other influences constant, demand usually slopes downward and supply upward. Their intersection identifies the competitive equilibrium. (openstax.org)
Writing these relationships as functions and , the equilibrium condition is
where and denote equilibrium price and quantity. As an illustrative example, suppose and . Equating them gives and . This is a hypothetical calculation rather than an empirical estimate.
Under perfect competition, individual buyers and sellers take the market price as given. At a price below equilibrium, excess demand creates pressure for the price to rise; above equilibrium, excess supply creates pressure for it to fall. These pressures explain the model’s adjustment mechanism, rather than guaranteeing instantaneous adjustment in actual markets. (openstax.org)
Changes in equilibrium
Comparative statics compares equilibria before and after a change in an underlying condition. A product’s own price change causes movement along its existing demand or supply curve. Changes in income, preferences, production costs, technology, or the prices of substitute and complementary goods can instead shift a curve. (openstax.org)
With conventionally sloped curves, an increase in demand raises both equilibrium price and quantity. An increase in supply lowers price and raises quantity. Decreases reverse these results. If both curves shift, one outcome may be ambiguous: simultaneous increases in demand and supply raise quantity, but price can rise, fall, or remain unchanged depending on the relative shifts. (openstax.org)
Price elasticity measures the responsiveness of quantity to price. Elasticities help determine how strongly a change affects prices and quantities. They also matter for tax incidence: in the standard competitive model, the relatively less elastic side of the market bears more of a tax’s economic burden, irrespective of which side formally remits it. (openstax.org)
Partial and general equilibrium
Partial equilibrium examines one market while treating relevant conditions elsewhere as given. It is useful when feedback from other markets can reasonably be neglected. General equilibrium instead considers interacting markets simultaneously, accounting for the fact that prices, incomes, production, and purchasing decisions are interconnected. (ocw.mit.edu)
For example, a change in a product market can alter demand for inputs and affect the labor market, while resulting income changes can influence product demand. In a competitive general-equilibrium model, consumers choose affordable consumption bundles, firms choose profit-maximizing production plans, and prices make their decisions compatible across markets. (ocw.mit.edu)
Existence, uniqueness, and stability are distinct questions. Existence asks whether an equilibrium satisfies the model’s conditions; uniqueness asks whether there is only one; stability concerns adjustment following a disturbance. An existence theorem does not itself prove that an economy will converge to that equilibrium. (ocw.mit.edu)
Equilibrium and economic welfare
Welfare economics evaluates allocations rather than merely identifying consistent transactions. Consumer surplus measures buyers’ willingness to pay above their expenditure, while producer surplus measures sellers’ receipts above the minimum required to supply the relevant units. Under standard competitive assumptions, equilibrium maximizes their combined surplus. (openstax.org)
The first fundamental welfare theorem connects competitive equilibrium with Pareto efficiency under specified conditions. Pareto efficiency means that no feasible reallocation can make someone better off without making someone else worse off. It does not imply equal incomes, equal opportunities, or a uniquely preferred distribution. (ocw.mit.edu)
The efficiency result is conditional. Externalities, public goods, information asymmetry, and market power can prevent market outcomes from satisfying the relevant efficiency conditions. Thus, market failure can coexist with equilibrium: participants’ choices may be mutually consistent even when an alternative allocation would improve welfare. (ocw.mit.edu)
Controls, taxes, and market structure
In the basic competitive model, binding price controls prevent the price from reaching its market-clearing level. A ceiling below equilibrium produces excess demand; a floor above equilibrium produces excess supply. A ceiling above equilibrium or a floor below it is nonbinding. Actual allocation under a binding control may therefore require mechanisms other than price, such as queues or rationing. (openstax.org)
A per-unit tax introduces a wedge between the price buyers pay and the price sellers receive. Equilibrium then requires demand at the buyer’s price to equal supply at the seller’s price. Where the tax reduces mutually beneficial transactions, it creates deadweight loss relative to the otherwise efficient competitive benchmark. (openstax.org)
Equilibrium analysis also applies outside perfect competition, but the conditions change. A monopoly chooses output using its demand and cost relationships; for an interior profit maximum, marginal revenue equals marginal cost. Its chosen price and output cannot generally be derived from the intersection of an independently defined competitive supply curve with demand. (openstax.org)