What is Supply and Demand Market Equilibrium?

Overview

In any economy, there are always consumers of goods, and producers of good. They together formulate the market, in a particular economy. Both producers of goods, as well as consumers combine together in order to operate in the market.

The producers are ‘suppliers’ of goods and services, whereas the consumers require those goods and services, and hence, they generate demand in this regard.

As a matter of fact, it is pivotal to realize the fact that the producers’ area only going to produce the respective goods and services if there is an existing demand for those goods and services.

Hence, both these parties act collaboratively in the market, so that there is a perfect balance in the market, based on which decisions can accordingly be taken.

What is Supply?

Supply can simply be defined as an economic concept, which refers to the total amount of goods and services that are available to the general consumers.

It is a basic representation of the goods and services that are produced by the company, for the purposes of reselling to their customers.

However, it must be noted that supply and quantity supplied are two different concepts, and there is a clear distinction between both of them from an economic stand point.

Therefore, supply comprises of two main notions: the ability, as well as the willingness of the suppliers to supply those particular goods to the market. Without either of these notions, supply is not possible.

As far as Supply is concerned, it is referred to as the ‘total’ amount of goods and services that are forwarded to the market to satisfy the existing demand.

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This is an aggregated figure, based on the goods and services that the company is producing over the course of time.

On the other hand, quantity supplied is the quantity that is supplied by the company, at a certain price in the market.

In this regard, it is imperative to note the fact that quantity supplied changes with changes in prices, depending on how much the goods and services are selling at that price.

In order to further understand the concept of supply, the following example is given:

Jeff Inc. manufactures chairs and tables for conferences and events. They have a capacity to product around 1500 sets if they operate at 100% threshold.

However, during covid-19, their demand saw a slack, because of which they restored to manufacturing around 800 tables.

They decided on this figure based on the demand estimates from their suppliers. They decided not to produce more chairs because they would otherwise be sold at lower prices.

In the example above, it can be seen that the maximum number of chairs that can be produced by Jeff Inc. is 1500.

During normal years, when they operate at full capacity, their supply is going to be 1500. However, the quantity supplied during this year is shrunken and is around 800.

What is Demand?

Demand is an economic term that refers to the willingness and ability of the consumers to buy a certain product at a certain price.

This is basically a denotation that the customers are willing and ready to buy those goods and services at the stipulated price. Hence, this demand is rudimentary to establish a basic understanding of what needs to be undertaken.

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In the same manner, there is also a difference between demand and quantity demanded. Quantity demanded is the willingness of the customers to purchase the goods at the given pricing.

On the contrary, demand is referred to as the aggregated goods and services that are demanded by the customers in the market. This can be illustrated using the following example.

The demand for wooden chairs in Pittsburgh saw a rise in Spring 2019. The demand in the local county was for around 3000 chairs. However, due to increased costs and prices, the prices of chairs rose by 30%.

As a result, the quantity demanded the chairs decreased by 40%. This was mainly because of the high price point.

In the example above, it can be seen that the total demand was around 3000. However, quantity demanded decreased as a result.

How does demand and supply equilibrium work?

Therefore, there is no doubt to the fact that demand and supply work hand in hand in order for the market to operate at equilibrium.

Equilibrium is defined as the common midpoint between supply and demand. This is ideally the price and the quantity at which both the supplier, as well as the consumer of goods and services is happy to operate.

Equilibrium is mainly identified using market signaling forces between both the supplier, as well as the producer of goods and services.

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