Concept: Market Equilibrium

Suppliers and demanders come together in markets. The suppliers have a well-defined commodity that they wish to sell, and demanders are interested in buying that commodity. The interactions of these suppliers and demanders determine the market price.

If the market is perfectly competitive—as we assume here—then there are so many buyers and so many sellers than no individual or firm can have any independent influence on the price.

The graph here shows the market demand curve and market supply curve for hamburgers. At each price, the demand curve shows the total number of hamburgers that will be demanded each day. Similarly, the supply curve shows how many burgers will be made available for sale each day at various possible prices.

Use the slider bar to choose a high price. At that price, you can see how many hamburgers will be demanded and how many will be supplied. You should be able to see that the quantity supplied—read off the supply curve—exceeds the quantity demanded—read off the demand curve. In this case, we say that a "Surplus" exists. The result is downward pressure on the market price.

As you move the price downward, you will see that the surplus becomes smaller. At a lower price, fewer hamburgers are offered for sale, and more are demanded. Both factors help shrink the surplus. But as long as a surplus exists, there will still be pressure for the price to fall.

You should be able to see that the surplus finally disappears at a price of $2 per hamburger. At that price, the number of burger offered by suppliers—7,000—exactly equals the number purchases by demanders. Everyone is satisfied in this state of "equilibrium."

To gain further insight into how markets work, move the slider bar to a very low price. Now, you should see that the quantity demanded exceeds the quantity supplied, leading to a "Shortage". Whenever a surplus exists—whenever quantity demanded exceeds quantity supplied—the price will rise. By increasing the price, you will see that the shortage becomes smaller and smaller until equilibrium is established at $2 per hamburger.

To moral of this exercise is that market forces drive the price to equilibrium. Only at the equilibrium price of $2 are the quantities supplied and demanded equal. In equilibrium, there are no forces causing the market price to change.