Market equilibrium and market-clearing condition

Summary

Market equilibrium is the price–quantity outcome in a market where the quantity demanded by consumers equals the quantity supplied by firms. Graphically, it occurs at the intersection of the demand and supply curves. At this price, the market “clears,” meaning there is no excess demand or excess supply, and an economic equilibrium is achieved for both price and the quantity traded. The market-clearing condition is therefore expressed as: quantity demanded = quantity supplied. Changes in market equilibrium are analyzed by shifting either the demand curve or the supply curve (holding other factors constant). A demand shift changes both the equilibrium price and equilibrium quantity, while a supply shift also changes both equilibrium outcomes, with the direction of price and quantity changes depending on whether supply moves rightward (more supply) or leftward (less supply).

Key Points

• 1

  Market equilibrium occurs where quantity demanded equals quantity supplied, i.e., where demand and supply intersect.

• 2

  The market-clearing condition means there is no excess demand or excess supply at the equilibrium price.

• 3

  Shifts in demand or supply move the equilibrium to a new price and quantity; movements along a curve reflect changes in quantity rather than changes in demand/supply.

• 4

  Demand shifts typically change equilibrium price and quantity by moving the demand curve, while supply shifts do the same by moving the supply curve.