Equilibrium of Supply and Demand, Effect of a Shift in Supply and Demand

Equilibrium is the state in which market supply and demand balance each other, and prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand—while an under-supply or shortage causes prices to go up resulting in less demand.

When the quantity demand exceeds the quantity supplied, leading to a shortage and increase in prices. This would cause an upward movement along the supply curve. While an under-supply or shortage causes prices to go-up resulting in less demand. Hence, there’s no surplus and no shortage of goods at the equilibrium of supply and demand. Thus, changes in the equilibrium price occur when either demand or supply, or both, shift or move.  Equilibrium is denoted in a chemical equation by the ⇌ symbol.

 An equilibrium price is a balance of demand and supply factors. It means when a product exchange for price occurs, the agreed-upon price is called an equilibrium price, or a market clearing price. An increase in supply when demand is constant shifts the supply curve to the right, which results in an intersection that yields lower prices and higher quantity. A decrease in supply, on the other hand, shifts the curve to the left, causing prices to rise and the quantity to decrease. When the increase in demand is less than the increase in supply, the right shift of the demand curve is less than the right shift of the supply curve. In this case, the equilibrium price falls whereas the equilibrium quantity rises.

Equilibrium quantity is the quantity demanded and the quantity supplied at the equilibrium price. Both the price and quantity are impacted when a market is out of equilibrium.

Market equilibrium is referred to as that state in the market where supply is equal to demand. When a market is at equilibrium, the corresponding price will not change unless there is an external factor that is instrumental in changing the supply or the demand. If the market price is below the equilibrium price, a shortage occurs because the quantity demanded exceeds the quantity supplied.

When the increase in demand is less than the increase in supply, the right shift of the demand curve is less than the right shift of the supply curve. In this case, the equilibrium price falls whereas the equilibrium quantity rises.

This condition translates to the fact that the demand curve shifts leftwards whereas the supply curve shifts rightwards. As they move in opposite directions, the final market conditions are deduced by pointing out the magnitude of their shifts.

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