The market equilibrium, is an almost perfect state in which a market the consumer You can buy what companies in the industry offer, at the prices they offer.
Any market has the mission to put the applicants and suppliers in contact, regulating through the price, the adequate exchange of goods and services between them.
What is understood by market?
It is the place, without necessarily speaking of a physical space, where purchase-sale transactions are carried out. In other words, it is the medium in which goods and / or services produced in an economy are traded.
A market it allows buyers (demand) and sellers (supply) to interact and agree to exchange a certain good or service at an explicit price.
That is, as soon as there is someone willing to buy a certain good, there is someone prepared to sell it, giving rise to what is known as a market.
Before going to balance concept market and in order to understand it in the simplest possible way, two simple concepts of the two elements that interact in the market are presented.
It is the quantity of a certain product that the consumer is willing to buy.
It is the quantity of a certain product that producers are willing to sell.
Role of supply and demand
It could be said that there is a basic principle on which the market economy is based, which is known as the law of supply and demand, which also reflects the relationship between the quantity demanded and the quantity supplied of a given good or service.
Said law explains the way to align prices, based on the quantities offered and consumer requests, establishing a price at which both parties agree to carry out the economic exchange.
Law of supply
It is given by the existence of a direct relationship between supply and the price of the good, and says:
- The higher the price, the greater the quantity supplied.
- At a lower price, the quantity supplied is less.
Law of demand
This given by the existence of an indirect relation of the demand with the price of the good, and says:
- The higher the price, the lower the quantity demanded.
- The lower the price, the greater the quantity demanded.
What is market equilibrium?
It has already been clear that a market is made up of:
- Plaintiffs with a desire to purchase certain goods at the lowest price.
- Bidders with ambitions to sell certain goods at the highest price.
Therefore, it is necessary that both parties enter into an agreement in order for the exchange to take place properly.
The market equilibrium It is that situation in which the quantity demanded is equal to the quantity supplied.
In this sense, the point where the demand and supply curves intersect is known as market break-even point. In this case, the market price also coincides with said equilibrium point, this price that corresponds to the equilibrium point is called the equilibrium price.
We can consider the following situations in the market equilibrium:
- Everything produced is sold.
- Everything that is demanded can be acquired.
- The quantity produced and the price are determined by means of the supply and demand of the good or service.
If the price is high.
- The supply will be above the demand is willing or can buy, therefore, by not selling certain quantities, producers must reduce their prices and in some cases the quantity produced.
If the price is very low.
- Demand will be greater than quantity supplied, therefore there will be a shortage and some consumers may be willing to pay a higher price in order to obtain the product.
The equilibrium point is very difficult to maintain over time, it can be said that equilibrium lasts very little, since there are factors such as, for example:
Fashion, economic crises, climatic catastrophes, competition, among others, that generate changes in the conditions of supply and demand.
Why is it important for a market to be in balance?
A weighting that speaks of the dynamism of the market is more realistic, with the view that balance does not exist.
- There is a problem in that there cannot be equilibrium within all markets, since the equilibrium tendency of a given market can generate imbalance in other markets, generating an unpredictable and chain effect of the productive and economic system.
However, after all, equilibrium is important to explain that the economic system incorporates automatic regulation, with a tendency towards optimal equilibrium, which through prices establishes correspondence and equality between the quantity demanded and the quantity supplied.
- If this balance is never reached, it is possible that there will be no benefits of the free market, implying that the market corresponds to another type in which the conditions, benefits and characteristics are established, but not in harmony.
- If there is no equilibrium, the prices and quantities demanded do not subjectively reflect consumer preferences, on the other hand, prices in the market system will never reflect the efficient use of resources.
To conclude, it is important to highlight that what makes this balancing process extraordinary is the fact that it is not consciously planned or directed by anyone.
For Adam Smith “The Invisible Hand”. Market forces, downward pressure on prices in the face of excess supply or upward tension when there is excess demand.
In this way, consumers and producers, motivated by their own interests, make decisions aimed at restoring a market equilibrium favorable to these interests, generating the tendency of the market to move towards equilibrium, readjusting itself adequately and avoiding situations of surplus production or shortage.