Explain briefly the concept of market equilibrium with the help of imaginary table.
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Answer:
Market equilibrium refers to the stage where the quantity demanded for a product is equal to the quantity supplied for the product.
The price when the quantity demanded is equal to the quantity supplied for the product is known as equilibrium price.
Equilibrium price is also termed as market clearing price, which is referred to a price when there is neither an unsold stock nor an unsupplied demand.
The market price refers to a current price at which a product is sold in the market. It is determined by the collaboration of two functions, namely, demand and supply. According to economic theory, the market price of a product is determined at a point where the forces of supply and demand meet. The point where the forces of demand and supply meet is called equilibrium point. Conceptually, equilibrium means state of rest. It is the stage where the balance between two opposite functions, demand and supply is achieved.
Let us understand the concept of market equilibrium with the help of an example.
The equilibrium price of a product is determined when the forces of demand and supply meet. For understanding the determination of market equilibrium price, let us take the example of talcum Powder shown in Table-10. In Table-10 we have taken the initial price of talcum powder as Rs. 100.
In this case, the quantity demanded is 80,000, while the supply is 10,000. This results in the shortage of 70,000 of talcum powder in the market. Due to this shortage, the sellers get a chance to earn more by increasing the price of the talcum powder and consumers are ready to purchase at the price quoted by sellers due to shortage of talcum powder.
This increase in profit results in increase in the production of a product to earn more profit, which, in turn, increases the supply of the product. The process of increase in prices goes on till the price of talcum powder reaches to Rs. 300. At this price, the demand and supply is equal to 40,000. Therefore, equilibrium is achieved and the equilibrium price is Rs. 300.
Table shows the market demand and supply for talcum powder in Mumbai with their varying prices of a week:
