Market equilibrium- such a state of the economy when the quantity of goods for which there is a steady demand at a certain price is equal to the quantity of goods offered for sale at a demanded price.

The part of the economic space in which the interests of buyers and sellers are located is called the economic area. In everyday life, the purchase and sale of goods can take place at completely different prices, limited by the upper limit of the demand price and the lower limit of the supply price. The price of such a real deal is determined by a number of factors: the balance of forces (monopoly or monopsony); irrational behavior due to lack of experience or poor awareness of the participants in the transactions.

Market equilibrium is considered stable when a deviation from it entails a simultaneous return to its original state. Otherwise, the equilibrium is unstable.

Instantaneous equilibrium characterizes a situation when the supply in the market does not change.

The state of the market is directly influenced by the tax policy pursued by the state. Impact of taxes on market equilibrium is reduced to the action of the following mechanism.

Taxes regulate the income of social strata of the population. Additional revenues affect sectors of the non-state economy. At the same time, it leads to a decrease in the income of enterprises and households and their opportunities for consumption and savings. Reducing tax rates has a positive effect on the income of households and businesses, which leads to stimulating demand.

Taxes represent costs that lead to an increase in the price of goods, they are passed on to producers and then to consumers.

It does not matter whether the seller or the buyer pays the tax, in any case it affects the state of the curves. If the buyer pays, the demand falls; if the seller - the offer decreases.

Market equilibrium

To graphically display the interaction of supply and demand on the graph, the supply and demand curves are combined (Fig. 4.3.1). The coincidence of the interests of buyers and sellers on the chart is characterized by the point of intersection of the supply and demand curves (E). This point is usually called a point market equilibrium, since the demand in it is exactly balanced by the supply. Market equilibrium- the approximate equality of supply and demand for a certain product at a given time and in a given market.

The equilibrium price corresponds to the point of market equilibrium

P E = P S = P D

and equilibrium volume

Q E = Q S = Q D.

Rice. 4.3.1. Equilibrium of supply and demand

Equilibrium price- the price of a commodity that is established in the market when balancing the quantities of supply and demand for this commodity. Equilibrium volume- the volume offered and sold on the market at the formed equilibrium price equal to the prices of the producer and the consumer. Market equilibrium is achieved when an equilibrium price is established, at which the volume of demand is equal to the volume of supply. At any other price level, the volumes of supply and demand do not coincide. If the real price is higher than the equilibrium price (P 1> P E), then there is an excess of supply. The graph clearly shows that at such a price, sellers are ready to offer significantly more goods than buyers can buy (Q 1S> Q 1D). If the price is below equilibrium (Р 2< P Е), возникает избыток спроса (или недостаточное количество товара – его дефицит), т.е. количественно предложение меньше спроса (Q 2S < Q 2D).

The equilibrium price performs the series functions:

1) informational - its value serves as a guideline for all subjects of a market economy;

2) normalizing - it normalizes the distribution of goods, signaling to the consumer whether this product is available to him and how much consumption he can count on at the current level of income. At the same time, it affects the manufacturer, showing whether he can recoup his costs or he should refrain from producing this product. Thus, through market prices, the producer's demand for resources is normalized;

3) stimulating - it forces the manufacturer to expand or reduce production, change technology and assortment so that the costs "fit" into the price and some profit remains.

Market equilibrium is often disturbed by either demand or supply factors. The change in the position of the market equilibrium point is shown in Figure 4.3.2.

Rice. 4.3.2. Market equilibrium point shift

Figure 4.3.2, a shows a shift in the demand curve towards an increase (to the right), which leads to an increase in the equilibrium price from P E 1 to P E 2 while increasing the equilibrium volume from Q E 1 to Q E 2.

A decrease in demand (Fig. 4.3.2, b) leads to a shift in its curve to the left, a decrease in the equilibrium price from P E 1 to P E 2, while reducing the equilibrium volume from Q E 1 to Q E 2. A decrease in market supply (Fig. 4.3.2, c) is accompanied by a shift in its curve to the left, which leads to an increase in the equilibrium price from P E 1 to P E 2, while reducing the equilibrium volume from Q E 1 to Q E 2. An increase in market supply (Fig. 4.3.2, d) leads to a shift in its curve to the right, a decrease in the equilibrium market price from P E 1 to P E 2, while increasing the equilibrium volume from Q E 1 to Q E 2.

On the sections of the supply and demand curves preceding the point of market equilibrium, the equilibrium price is below the maximum price at which some consumers could buy the product and above the minimum at which the most advanced producers could sell the product (Figure 4.3.3). The number of products Q A consumers would be ready to buy at the price P AD> P E, and the producers would sell at the price P AS< P Е. В действительности все сделки были осуществлены по равновесной цене, т.е. покупатели этого товара заплатили меньше, а производители получили больше, чем ожидали. В итоге и те, и другие получают выгоду в виде излишков потребителя и производителя.

Rice. 4.3.3. Consumer and producer surpluses

Consumer surplus- this is the difference between the amount of money that the consumer was willing to pay and the amount that he actually paid. Producer surplus- this is the difference between the amount of money for which the manufacturer agreed to sell his product, and the amount that he actually received. Public benefit for sellers and buyers Is the sum of the surplus of consumers and producers. At the same time, along with the winners from the equilibrium price, there are also losers. The equilibrium price, fulfilling its functions, made this product inaccessible to some number of poorer consumers (the demand curve to the right of point E) and its production unprofitable for producers with production costs exceeding the market price (the segment of the supply curve to the right of point E).

In economics, it is customary to distinguish three periods: instantaneous, in which all factors of production are considered as constant, short (short-term), in which one group of factors is considered as constant, and the other as a variable, and long-term (long-term), in which all factors of production are considered. as variables. According to these periods, instant, short-term and long-term equilibrium is distinguished.

In an instantaneous period (Fig. 4.3.4, a), the seller is deprived of the opportunity to adjust the volume of supply to the volume of demand, since he has a strictly fixed amount of goods. In this case, the equilibrium price is determined exclusively by demand, it coincides with the demand price, while the volume of sales depends only on the volume of supply.

a) instantaneous period

b) short (short-term) period

Rice. 4.3.4. Equilibrium in the instant and short period

In the short (short-term) period, the production capacities of the enterprise are considered unchanged, but the intensity of their use may change (in one, in two, in three shifts). Consequently, the volume of used variable resources and the volume of production change. In this case, the supply line consists of two segments (Fig. 4.3.4, b). The first segment, which has a positive slope, is bounded on the abscissa by a point corresponding to the production capacity Q K. The second segment is represented by a vertical segment, which indicates that it is impossible to go beyond the limits of the available production capacity in a short period. Up to this border, the equilibrium volume and price are determined by the intersection of the supply and demand lines, and beyond it, as in the instantaneous period, the price is determined by demand, while the supply volume is determined by the size production facilities.

In the long run, the manufacturer can change both the intensity of the use of production capacities and their sizes, i.e. the change in the scale of production is possible. In this case, three situations are possible. In the first case (Fig. 4.3.5, a), when a change in the scale of production occurs at constant costs, an increase in the equilibrium volume occurs without a change in the equilibrium price. In the second case (Fig. 4.3.5, b), a change in the scale of production occurs with increasing costs (for example, due to an increase in prices for the resources used). In this case, an increase in the equilibrium volume is accompanied by an increase in the equilibrium price.

a) at constant costs

b) with increasing costs

c) with decreasing costs

Rice. 4.3.5. Long-term balance

In the third case (Fig. 4.3.5, c), when a change in the scale of production occurs at decreasing costs (for example, due to a decrease in prices for the resources used), an increase in the equilibrium volume is accompanied by a decrease in the equilibrium price.

Market price. Market equilibrium

The functions of supply and demand that we considered earlier interact in the market for a product. Under the influence of the competitive environment of the market, supply and demand are balanced, as a result of which the market price and the quantity of the purchased goods are established.

Market price is considered the equilibrium price when it determines the level at which the seller still agrees to sell, and the buyer already agrees to buy the product.

Graphically, the state of equilibrium in the market for a particular product can be represented by combining the supply and demand curves in one figure (Fig. 4.1).

Rice. 4.1. Market equilibrium graph of supply and demand.

Intersection point of curves E- this is the equilibrium point of supply and demand. Then for a given quantity of goods QE the maximum price at which buyers can purchase it (demand price РD), will coincide with the price that is the minimum acceptable for sellers (the offer price Ps), which will mean the establishment of a stable equilibrium price in this market PE, by which the equilibrium quantity of goods will be bought and sold QE.

Analytically, using the familiar supply and demand functions, the equilibrium state in the market for a product can be written as follows:

It should be noted that both buyers and sellers will be satisfied with the current market situation. A price decrease below the equilibrium level will be disadvantageous not only to sellers, but also to buyers, since this will reduce the amount of offered goods, and an increase in prices above the equilibrium level will not suit not only buyers, but also sellers, since it will reduce the purchased volume of goods.

All other things being equal, the market price corresponds to the quantity of goods that buyers want to buy, and sellers agree to sell, that is, there is no surplus or deficit for each specific product. Thus, market equilibrium is its state when the condition Qd = Qs. A deviation from this state will set in motion forces seeking to return the market to a state of equilibrium, that is, to eliminate the surplus (when Qd< Qs) or shortage of goods on the market (Qd> Qs).

In analytical form for the supply and demand functions, the equality of the volume of demand QD volume of supply QS at a given equilibrium price PE will look like this:

In order to better visualize the mechanism for setting the market price under the influence of supply and demand, let us return to our example, which characterizes the situation in the potato market.

Let's combine our two tables on potato consumption into one (Table 4.1).

Table 4.1. Potato demand and supply

The table shows that only at a price of 7.50 rubles. for 1 kg of potatoes, supply and demand are balanced. Let's transfer this data to the graph (Fig. 4.2).

Rice. 4.2. Equilibrium price.

The dot reflects the coincidence of the interests of sellers and buyers at a price of 7.50 rubles. Therefore, 7.50 rubles. (PE) - equilibrium market price. At a higher price, excess supply over demand. For example, if the price is 10 rubles. only 5 tons of potatoes will be bought, and Utah is offered, therefore, the surplus will be 5 tons. This surplus, as a result of the competition of sellers, will help to reduce the price. At a price below the counterbalancing price, demand exceeds supply and there is deficit product on the market. In this case, excess demand and competition from buyers will lead to higher prices.

Equilibrium Mechanism

Let us consider the mechanism for establishing market equilibrium when, under the influence of changes in supply or demand factors, the market leaves this state. There are two main options for the imbalance between supply and demand: excess and shortage of goods.

Excess(surplus) of a commodity is a situation in the market when the value of the supply of a commodity at a given price exceeds the value of demand for it. In this case, competition arises between manufacturers, a struggle for buyers. The winner is the one who offers more favorable conditions for the sale of goods. Thus, the market seeks to return to equilibrium.

Deficit goods - in this case, the amount of demand for the goods at a given price exceeds the offered quantity of goods. In this situation, competition arises between buyers for the opportunity to purchase a scarce product. The winner is the one who offers the higher price for the given product. The increased price attracts the attention of manufacturers, who begin to expand production, thereby increasing the supply of goods. As a result, the system returns to a state of equilibrium.

Thus, the price performs a balancing function, stimulating the expansion of production and supply of goods in the presence of a shortage and restraining supply, ridding the market of surpluses.

The balancing role of price is manifested both through demand and through supply.

Suppose that the equilibrium that was established in our market was violated - under the influence of any factors (for example, income growth), demand increased, as a result, its curve shifted from D1 v D2(Fig. 4.3 a), and the proposal remained unchanged.

If the price of a given product did not change immediately after the shift in the demand curve, then following the growth in demand, a situation arises when at the same price Р1 the quantity of goods that each of the buyers can now purchase (QD) exceeds the volume that can be offered at a given price by manufacturers of this item (QS). The amount of demand will now exceed the amount of supply of this product, which means the emergence shortage of goods at the rate of Df = QD - Qs in this market.

The shortage of goods, as we already know, leads to competition between buyers for the opportunity to purchase this product, which leads to an increase in market prices. In accordance with the law of supply, the reaction of sellers to an increase in price will be an increase in the volume of the offered goods. On the chart, this will be expressed by the movement of the market equilibrium point E1 along the supply curve until it intersects the new demand curve D2 where a new equilibrium of this market will be achieved E2 with equilibrium quantity of goods Q2 and equilibrium price P2.

Rice. 4.3. Equilibrium price point shift.

Consider a situation where the equilibrium state will be violated on the supply side.

Suppose that, under the influence of some factors, there was an increase in supply, as a result, its curve shifted to the right from the position S1 v S2 and the demand remained unchanged (Fig. 4.3 b).

Provided that the market price remains at the same level (P1) increased supply will lead to excess goods in size Sp = Qs– QD. The result is competition between sellers, leading to a decrease in the market price (from Р1 before P2) and an increase in the volume of goods sold. This will be reflected on the chart by moving the market equilibrium point. E1 along the demand curve until it intersects with the new supply curve, which will lead to the establishment of a new equilibrium E2 with parameters Q2 and P2.

Similarly, it is possible to identify the effect on the equilibrium price and the equilibrium quantity of goods of a decrease in demand and a decrease in supply.

In the educational literature, four rules for the interaction of supply and demand are formulated.

An increase in demand causes an increase in the equilibrium price and equilibrium quantity of goods.
A decrease in demand causes a fall in both the equilibrium price and the equilibrium quantity of goods.
An increase in supply entails a decrease in the equilibrium price and an increase in the equilibrium quantity of goods.
A decrease in supply entails an increase in the equilibrium price and a decrease in the equilibrium quantity of goods.

Using these rules, you can find an equilibrium point for any changes in supply and demand.

The return of the price to the market equilibrium level can be mainly hindered by the following circumstances:

administrative regulation of prices;
monopolism a producer or consumer, allowing to maintain a monopoly price, which can be both artificially high or low.

State regulation of market processes through taxes and subsidies

The interference of external forces in the operation of the law of supply and demand can affect the formed market equilibrium. One of the levers for regulating the market system that does not violate the law of supply and demand are taxes. They do not change the conditions of market processes and do not restrict the freedom of action of market actors. However, both consumers and producers of goods perceive tax increases extremely negatively, since any tax, direct or indirect, is invariably included in the price of the sold product. The rise in price, inevitably following an increase in tax, causes a decrease in both consumer purchases and the supply of taxable goods.

Graphically, this situation can be represented as follows. As a result of the introduction of a new tax or an increase in the interest rates of existing taxes, the supply curve S1 will move left and up by the amount of tax T because the seller now has to charge a higher price for the product to get the same revenue. In response to this reduction in supply, the market equilibrium point will move along the demand curve from the position E1 up to the intersection with the new supply curve S2, i.e. to point E2. As a result, a new equilibrium will be established at the market, in which the volume of goods will decrease from Q1 before Q2 and the price will increase from Р1 before P2(fig.4.4).

Rice. 4.4. Consequences of the introduction of the tax.

Despite the fact that formally the tax is paid to the state budget directly by the manufacturer or seller of goods, however, most of it is passed on to consumers who buy taxable goods.

Thus, negative effect tax increases - a general decrease in the production of goods and a decrease in their consumption by buyers due to their rise in price.

The opposite result is achieved by providing subsidies (these can be viewed as negative taxes) to both the buyer and the seller.

Offset of supply and demand curves by subsidy amount G will be the opposite of their tax bias.

For example, the receipt of a subsidy by the seller will be equivalent to a decrease in his costs and, on the graph, will lead to a downward shift of the supply curve by G(Figure 4.5), which will lead to an increase in the equilibrium quantity of goods with Q1 before Q2 and at the same time to a decrease in the equilibrium price from Р1 before P2.

Rice. 4.5. Consequences of the introduction of subsidies.

If the buyer receives a subsidy, then by the amount G the demand curve will move, not the supply curve.

The influence of the state on market processes through price regulation

Equilibrium prices established in the market at a certain moment, due to various circumstances, do not always suit society.

1. The market price is considered the equilibrium price when it determines the level at which the seller still agrees to sell, and the buyer already agrees to buy the product. Graphically, the state of equilibrium in the market for a particular product can be represented by combining the supply and demand curves in one figure. The intersection of the curves is the equilibrium point of supply and demand.

2. In case of deviation from the equilibrium state, that is, in the presence of a deficit or surplus of goods on the market, the price plays a balancing role, stimulating the growth of supply in the event of a deficit and restraining it in case of overstocking.

The following options for changing the equilibrium price are possible:

an increase in demand causes an increase in the equilibrium price and equilibrium quantity of goods;
a decrease in demand causes a fall in both the equilibrium price and the equilibrium quantity of goods;
an increase in supply entails a decrease in the equilibrium price and an increase in the equilibrium quantity of goods;
a decrease in supply entails an increase in the equilibrium price and a decrease in the equilibrium quantity of goods;
taxes are one of the levers of regulation of the market system. Such regulation does not violate the principles of formation of the equilibrium price according to the laws of supply and demand, does not change the conditions of market processes and does not restrict the freedom of action of market actors;
state intervention in market pricing by setting fixed prices affects the very action of market mechanisms, changing the process of achieving equilibrium. The consequences of price controls, especially when applied for a long time, have a negative effect both in the social and economic spheres.

Equal to each other.

But a situation always arises when, when various factors change, an imbalance arises between supply and demand and market equilibrium is lost. Early economists, representatives of the classical school, viewed market equilibrium as a situation that could independently come to a point of equality. They believed that the market has the ability to self-regulate and comes to equilibrium on its own without any external interference.

In economic theory, there are two approaches to the consideration of market equilibrium.

1 approach. According to Walras.

Swiss economist Leon Walras considered market equilibrium based on their quantify... Let's consider this approach on the chart.

At the point \ mathrm E, the initial equilibrium in the market is shown, which corresponds to (\ mathrm Q) _ \ mathrm E, the quantity of goods at the price of (\ mathrm P) _ \ mathrm E. It is at the point \ mathrm E that the supply and demand curves intersect, which means that with such a volume and price of goods, supply and demand are equal. But when the price of the goods increases to the level (\ mathrm P) _1, the amount of demand will decrease to the level \ mathrm Q_1 ^ \ mathrm D, and the volume of supply of the goods, on the contrary, will increase to the level \ mathrm Q_1 ^ \ mathrm S. There will be a producer surplus, as a result of which sellers, trying to get rid of excess goods, will begin to reduce prices for it. As a result, the demand for cheap goods will start to grow. This cycle will continue until equilibrium is restored in the market.

When the price of a product decreases to the level (\ mathrm P) _2, the demand for it will increase to the level \ mathrm Q_2 ^ \ mathrm D and will exceed the supply, which will decrease to the level \ mathrm Q_2 ^ \ mathrm S. There will be a consumer surplus, as a result of which there will be a shortage of goods on the market. But excessive excitement for a cheap product will put pressure on the price, which will rise sooner or later. And when the price rises, producers, in turn, will begin to increase the supply of goods until the market is saturated.

The condition for establishing market equilibrium according to Walras can be represented in the form of equality:

Q_D (P) \; = \; Q_S (P).

This equality shows that, according to Walras, the quantities of supply and demand are a function of price.

2 approach. According to Marshall.

The English economist and one of the main representatives of the neoclassical school, Alfred Marshall, believed that price was the only factor in establishing market equilibrium.

On this chart also shows the equilibrium point \ mathrm E at which supply and demand are equal. But if the bid price \ mathrm P_1 ^ \ mathrm D exceeds the bid price \ mathrm P_1 ^ \ mathrm S, manufacturers will immediately react to this by increasing the supply from the level (\ mathrm Q) _1 to the level (\ mathrm Q) _ \ mathrm E and the price will settle at (\ mathrm P) _ \ mathrm E. If the bid price \ mathrm P_2 ^ \ mathrm D is lower than the bid price \ mathrm P_2 ^ \ mathrm S, then sellers will reduce the supply, and buyers will reduce their demand, as a result of which the equilibrium price will be restored.

Market equilibrium - the state of the market when demand and supply are equal. revival. Market equilibrium:

1.It is established as a result of the interaction of households 'decisions to buy a product and manufacturers' decisions to sell it;

2. is expressed in the equilibrium price of the product and in its quantity actually sold on the market.

Market equilibrium

Market equilibrium - a situation in the market when the demand for a product is equal to its supply; the volume of the product and its price are called equilibrium.

Market equilibrium is characterized by an equilibrium price and equilibrium volume.

Equilibrium price (equilibrium price)- the price at which the volume of demand in the market is equal to the volume of supply. Sazhina M.A., Chibrikova G.G. Economic theory: Textbook for universities. - M.: Publishing house NORMA, 2003, p. 48. On the supply and demand graph, it is determined at the intersection of the demand curve and the supply curve.

Equilibrium volume (equilibrium quantity)- the volume of demand and supply of goods at an equilibrium price.

Market equilibrium mechanism

Free movement of price in accordance with changes in supply and demand results in the fact that goods sold in the market are distributed according to the ability of buyers to pay the price offered by the manufacturer. If demand exceeds supply, then the price will rise until demand ceases to exceed supply. If supply is greater than demand, then in a market of perfect competition, the price will decline until all offered goods find their buyers.

Types of market equilibrium

Equilibrium is stable and unstable.

If, after an imbalance, the market comes to a state of equilibrium and the previous equilibrium price and volume are established, then the equilibrium is called stable.

If, after an imbalance in the equilibrium, a new equilibrium is established and the price level and the volume of demand and supply change, then the equilibrium is called unstable.

Types of resistance:

1. Absolute;

2. Relative;

3. Local (price fluctuations occur, but within certain limits);

4. Global (Set for any fluctuations).

The equilibrium price functions are as follows:

1. Distribution;

2. Informational;

3. Stimulating;

4. Balancing.

Equilibrium in the market for goods

An equilibrium in an economic system is a state in which each participant in this system does not want to change his behavior.

In the market for a good, the actors are sellers and buyers who decide to sell or buy a certain amount of the good, depending on its price. Equilibrium in the market occurs when all buyers and sellers can buy or sell the amount of goods that they want to buy or sell.

Equilibrium in the market is a situation when sellers offer for sale exactly the amount of goods that buyers decide to purchase (the volume of demand is equal to the volume of supply).

Since buyers and sellers want to sell or buy different quantities of the good = depending on its price, for market equilibrium it is necessary that a price be established at which the volumes of supply and demand coincide. In other words, price equalizes supply and demand.

The price that causes the coincidence of the volumes of demand and supply is called the equilibrium price, and the volumes of demand and supply at this price are called the equilibrium volumes of demand and supply.

Under equilibrium conditions, the so-called clearing of the market takes place = there will be no unsold goods or unsatisfied demand in the market (buyers who want to buy goods at a fixed price and who could not do it due to the lack of sellers).

Thus, in order to find equilibrium in the market for some good, it is necessary to determine what price will cause in this market such a volume of supply that will correspond to the volume of demand = at this price, sellers will bring to the market exactly as much of the good they have produced as buyers want to carry. Such a price is called the equilibrium price, and the volume of supply and demand corresponding to it = equilibrium volumes of demand and supply.

How to determine balance?

To do this, you need to use the supply and demand functions and determine at what value of the price the supply and demand functions will give the same values

Suppose that curve D in Fig. 1 is the consumer demand curve. And the S curve is the supply curve.

The curves intersect at some point A (in other words, they have a common point A), which shows the equilibrium values of price and quantity in this market. The point of intersection of the supply and demand curves is called the equilibrium point.

Rice. 1. Balance point

Accordingly, at any value of the price below the equilibrium, the opposite picture will be observed. Sellers will want to cut the supply somewhat, as lower prices mean less profitable production. And buyers will want to increase consumption, since more low price means an increase in their purchasing power and a decrease in the "difficulty" of purchasing a product. As a result, there will be a shortage of supply (excess demand) = consumers will remain on the market who would like to purchase some more goods at this price, while all the goods brought by the producers have already been sold.

Can the curves not intersect?

Can a situation arise when it is impossible to establish equilibrium in the market when positive values prices and sales? In the language of graphs, this will mean that the curves do not intersect, or, in other words, do not have common points.

Rice. 2. Situations when market equilibrium does not arise.

In principle, such a situation is possible. We can imagine there are two cases where the supply curve is entirely above the demand curve.

The first case includes markets for goods, the production of which requires very high costs due to the high cost of material (for example, chairs made of pure gold) or high labor intensity (a castle glued from grains of sand). At the same time, not a single consumer will agree or simply cannot (due to limited income) pay for the production of these expensive goods. The supply curve will be much "above" the demand curve for these goods (Fig. 2. a). This means that market equilibrium occurs at zero values of price and quantity = that is, the market for such goods simply does not exist.

In another case, the production of goods may not require large costs, but the goods themselves may be completely useless to consumers. For example, handleless tablespoons are cheap to make = but who wants to buy these spoons even "for free"? Therefore, in this case no matter how cheap the production of these goods is, the demand curve will either coincide with the vertical axis (which practically means its absence), or "cuddle up" to it so much that there are no common points with the supply curve (Fig. 2.b) ...

Equilibrium Mechanism

How is market equilibrium established? How do buyers and sellers determine that a certain price is equilibrium and begin to make deals only at this price?

The mechanism for setting a single price may differ depending on the characteristics of a particular market and its participants.

Suppose that there were no transactions at all in the market and that sellers and buyers do not know the desires and capabilities of each other. Thus, we must determine how the equilibrium is established in the new market.

In such a new market, trial transactions are first made, as a result of which the first buyers somehow agree with the individual sellers on the price and acquire the good. There is a certain range of prices. Since the market is perfect (according to our assumption), every next buyer and every seller knows at what prices the deals have already been made, and are guided by the most profitable ones. Buyers will seek to buy at the lowest price and go to those sellers who offer that price. Sellers will strive to sell the product at a higher price, but will not be able to bid for the product higher than others, = they will be left without a buyer. At the same time, if sellers see that their product is being sold out too quickly at a fixed price, and soon they will find themselves without a product, they will gradually raise the price. If they see that the product is not going to be sold, they will start to reduce the price little by little.

The speed with which the market finds an equilibrium price depends on the "mobility" of its participants and on the ease of transmission of information in the market (that is, on the perfection of the market).

For example, if sellers do not know what demand will be presented for their product (if, for example, the market for a good has just emerged), they will first estimate the demand and produce the corresponding amount of the good. If their valuation turns out to be undervalued and the product produced is not enough for consumers at the price they will charge, sellers will increase price and output in order to increase profits. If again there is an unsatisfied demand = sellers will again increase the price and output, etc. So gradually equilibrium in the market will be established at the point of intersection of the supply and demand curves.

In all next days sellers and buyers will know at what prices the deals were made earlier, and, starting the trading day, they will be guided by the "yesterday" price. The new price will be adjusted during the trading process.