Market Equilibrium

When the quantity of something being supplied is the same as the how much of that thing is being demanded, the market of that thing is in equilibrium.

Let's say you're trying to make a pie, but you're not sure what kind. Well, apple farmers are willing to produce 10 pounds of apples at $5/pound and people want 10 pounds of apples at that price; the market would be in equilbrium at the price of $5/pound.

Now let's look at the pumpkin market, where producers make 20 pounds of pumpkin for $10/pound, but buyers are only willing to get 5 pounds of pumpkins at that price, so the market is in disequilibrium...namely, a surplus, since suppliers are producing more pumpkin than is needed.

Producers are making 15 cartons of blueberries, which go for $1/carton, but at such a cheap price, consumers want 20 cartons. That means that there aren't enough cartons of blueberries to meet the quantity demanded, so the market's in disequilbrium, namely a shortage.

Now that you figured out the markets of all these fruits, we're going to make a pie to celebrate.

When we’re talking “market equilibrium,” we’re talking about the market for a specific good or service. Pick a thing...any thing. Market equilibrium happens when the quantity demanded of a thing equals the quantity supplied of that thing, at a given price. At market equilibrium, there’s no excess supply (which would mean cranky suppliers) and no excess demand (which would mean cranky consumers). At equilibrium, everybody’s...chill.

The reason economists gush over market equilibrium like a diehard Belieber at a J Beebs concert is because, well...it's kind of a magical force of its own, like the Mother Nature of capitalism. When the market is competitive, market equilibrium happens naturally. If you’ve ever heard of Adam Smith’s “Invisible Hand,” well...this is what he was talking about.

In a perfectly competitive market, where there are lots of equally-sized sellers selling, and no Amazons or Walmarts stomping all over the little guys, the invisible hand is what keeps surpluses and shortages from happening.

For example: the fake mustache market. Yes, there’s a market for that.

Where the mustache supply curve crosses with the mustache demand curve is where mustache equilibrium is at. Drop a plumbline down from equilibrium to see the equilibrium quantity of mustaches. Likewise, you can see the equilibrium price where the supply and demand curves cross on the left hand side of the graph.

In our perfectly competitive mustache market, the amount of mustaches sold and the price they’re sold at is capitalism’s invisible hand at work. When suppliers try to sell their fake mustaches at too high a price, consumers will think it’s a ripoff and go buy something else instead, leaving sellers with a surplus of fake mustaches.

Remember, the mustache market has many mustache suppliers, all competing against each other. Consumers will flock to the mustache supplier with the best prices; this keeps suppliers from holding the fake mustache market hostage. Many mustache suppliers competing for the dollars of mustache-buyers will naturally drive prices down if they’re too high.

The invisible hand smacks mustache suppliers upside the head, making suppliers realize they should drop their price if they wanna sell some mustaches, but they don’t want to make the price too low.

If suppliers drop the price of fake mustaches too low, there’ll be a mustache shortage. And, uh, we can’t have that. When there’s a shortage of mustaches, there’s an ugliness not even the best fake mustache could cover up. Consumers will be at each other’s throats, fighting over fake mustaches like it’s Black Friday.

When they’re all sold out, consumers will be demanding more...it’s just too good of a deal.

In the case of a mustache shortage, the invisible hand will be smacking mustache suppliers upside the head again, making the supplier realize they could be making more money if they sold more mustaches, and at a higher price. After competitive suppliers get some wise guidance from the smack smack of the invisible hand...we get market equilibrium.

Just like Goldilocks, the invisible hand says “not too much, not too little, but juuuuuusssst right.”