DILIP K SINGH

MBA K
1421212
EQUILIBRIUM
Market equilibrium is a situation in which the forces of demand and supply are equal. At this point there is no
pressure exacted on the demand and supply to change. The equilibrium point is therefore determined by the
intersection of the supply and the demand curve. At the point of intersection we have the equilibrium prices that
a commodity should be sold at in the market and the equilibrium quantity which is the quantity the sellers are
willing to supply in the market at the equilibrium prices.
Equilibrium is a concept which is theoretical in nature and does exist to a particular extent in the real world but
it is not seen in all cases. Equilibrium pushes the supply and demand to a point where both meet each other and
there is a balance between supply and demand. Although in the real world there is no perfect equilibrium that
takes place and things do not become stagnant after reaching a particular point but it keeps changing due to
various factors in the economy which triggers demand and supply of products, there is a force which keeps the
price from being set too high in fact so high that no one will buy the product or too low below a point where
you do not recover the cost of the product also. For example In terms of supply, higher prices encourage supply,
given the supplier's expectation of higher revenue and profits, and hence higher prices eliminates the need of
the supplier to supply more in order to gain profits. Whereas Lower prices discourage supply because of the
increased number of products that he needs to produce and sell in order to gain the same amounts of profit that
he gained earlier when he used to sell a few products at a premium price. In the case of a college canteen which
supplies cola, other drinks or other products become more or less attractive to supply whenever the price of cola
changes, in case the price of cola rises the supplier would like to sell more of the product due to a greater profit
margin rather than selling some other product which gives him relatively a lesser margin and vice versa, and
this increase in the price of cola will also trigger the demand for cola which in turn would be reduced due to the
increase in price. If the market is working effectively, with information passing quickly between buyer and
seller in this case, between students and a college canteen, the market will quickly readjust, and the excess
demand and supply will be eliminated. In the case of excess supply, sellers will be left holding excess stocks,
and price will adjust downwards and supply will be reduced. In the case of excess demand, sellers will quickly
run down their stocks, which will trigger a rise in price and increased supply. The more efficiently the market
works, the quicker it will readjust to create a stable equilibrium price. Thus we can say that due to the factors of
demand and supply the equilibrium does exist in the real world but it does not meet exactly at a point and
stabilize but tends to keep moving towards the point and thus maintaining a fair balance between the demand
and the supply.
Equilibrium is applicable in firms to a certain extent in order to determine the price at which the company can
manage to get maximum profit by selling the apt quantity of goods where even the consumers will be happy to
buy them at that price point. Equilibrium is used in the following ways
Equilibrium of Consumer: On the basis of income, prices and preferences of individual it determines the
manner in which a consumer derives maximum satisfaction i.e. equilibrium.
Equilibrium of a firm: This implies determination of level of output that yields maximum profit
Industry Equilibrium: It occurs when number of firms in the industry remains constant i.e. there is neither entry
nor exit of firms.
Factor Market: An individual factor reaches the position of equilibrium when it receives highest possible
reward. Since the alternative reward is less he sticks to that employment
Equilibrium can be traced out by recording all the various price points at which different quantity of goods are
bought by the customer. After recording the following data if the company wants to arrive at a point where the
maximum number of goods are sold with both the satisfaction of the buyer as well as the seller the company has
DILIP K SINGH
MBA K
1421212
to draw a demand curve as well as the supply curve at various price points and where the demand curve meets
the supply curve the point is said to be as the point of equilibrium where satisfaction from both the ends are
attained. A real life example of equilibrium of an oil company is given below for better depiction of how it can
actually be measured.



(Ref: Mind Tools)
The Great Tortilla Crisis
Thousands in Mexico City protest rising food prices. So read a recent headline in the New York Times.
Specifically, the demonstrators were protesting a sharp rise in the price of tortillas, a staple food of Mexicos
poor, which had gone from 25 cents a pound to between 35 and 45cents a pound in just a few months. Why
were tortilla prices soaring? It was a classic example of what happens to equilibrium prices when supply falls.
Tortillas are made from corn; much of Mexicos corn is imported from the United States, with the price of corn
in both countries basically set in the U.S. corn market. And U.S. corn prices were rising rapidly thanks to
surging demand in a new market: the market for ethanol. Ethanols big break came with the Energy Policy Act
of 2005, which mandated the use of a large quantity of renewable fuels starting in 2006, and rising steadily
thereafter. In practice, that meant increased use of ethanol. Ethanol producers rushed to build new production
facilities and quickly began buying lots of corn. The result was a rightward shift of the demand curve for corn,
leading to a sharp rise in the price of corn. And since corn is an input in the production of tortillas, a sharp rise
in the price of corn led to a fall in the supply of tortillas and higher prices for tortilla consumers. The increase in
the price of corn was good news in Iowa, where farmers began planting more corn than ever before. But it was
bad news for Mexican consumers, who found them- selves paying more for their tortillas
(Ref: Worth publishers)
Factors Other than demand and supply that effect equilibrium
1) Influence of trade unions
2) Change in taste of consumers
3) Barriers in movement of labour
4) Political influence
5) Change in the income of people or rise/decrease in purchasing power
6) Government intervention(policies)
Buyer Demand per Consumer
Price per liter Quantity (liters)
demanded per week
$2.00 50
$1.75 60
$1.50 75
$1.25 95
$1.00 120
Gas Supply per Consumer
Price per liter Quantity (liters)
supplied per week
$1.20 50
$1.30 60
$1.50 75
$1.75 95
$2.15 120