Market Equilibrium

• In perfectly competitive markets, prices will adjust where quantity demanded by buyers exactly equals quantity supplied by sellers. At this equilibrium point, no further pressure will be placed on prices and quantities.
• Equilibrium is defined as a position of balance. It is a position from which there is no inherent tendency to deviate in the absence of an exogenous change.
• During a surplus, downward pressure is applied on the price of the good, causing utility-maximising consumers, constrained by their budget, increase quantity demanded, while profit-maximising producers, with the higher marginal cost, reduce quantity supplied to avoid the marginal losses. This process will continue until quantity demanded = quantity supplied.

  
• During a shortage, upward pressure is applied on the price of the good, causing utility-maximising consumers, constrained by their budget, decrease quantity demanded, while profit-maximising producers, with the lower marginal cost, increase quantity supplied to capture marginal profits. This process will continue until quantity demanded = quantity supplied.