Microeconomics Essentials: Market Equilibrium and Price as a Coordinating Signal

Equilibrium Price and Quantity: The Market-Clearing Point

Equilibrium price is the price at which the quantity buyers want to purchase equals the quantity sellers want to sell. Equilibrium quantity is that common quantity. On a standard supply-and-demand graph, equilibrium is the intersection of the demand curve and the supply curve.

Price acts as a coordinating signal: when the market is not at equilibrium, the resulting mismatch (surplus or shortage) creates pressure for price to change, which tends to move the market back toward the intersection.

(1) Finding Equilibrium from a Graph and from Schedules

A. Finding equilibrium from a graph (intersection method)

To read equilibrium from a graph:

• Step 1: Locate where the demand curve and supply curve cross.
• Step 2: Read the price on the vertical axis at that point (equilibrium price).
• Step 3: Read the quantity on the horizontal axis at that point (equilibrium quantity).

Graphically, equilibrium is the only point where there is no built-in tendency for price to rise or fall, because the market is “cleared” (no persistent excess supply or excess demand).

B. Finding equilibrium from schedules (table method)

When you are given demand and supply schedules, equilibrium is the row where Qd = Qs.

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Numerical example (market for coffee):

From the table, equilibrium occurs at $3 and 50 cups, because that is where buyers and sellers plan the same quantity.

C. A quick “difference” check (useful for speed)

Sometimes it helps to compute Qd − Qs at each price:

• If Qd − Qs > 0, there is a shortage (excess demand).
• If Qd − Qs < 0, there is a surplus (excess supply).
• If Qd − Qs = 0, the market is at equilibrium.

(2) What Happens When Price Is Set Above or Below Equilibrium

Surplus (excess supply): price above equilibrium

A surplus occurs when the price is above equilibrium, so sellers want to sell more than buyers want to buy at that price. In symbols: Qs > Qd.

Using the coffee table above, suppose the price is set at $4:

• Quantity demanded at $4: 30
• Quantity supplied at $4: 70
• Surplus size = Qs − Qd = 70 − 30 = 40 cups

Economic meaning: inventories pile up, products remain unsold, and sellers compete more aggressively for buyers.

Shortage (excess demand): price below equilibrium

A shortage occurs when the price is below equilibrium, so buyers want to buy more than sellers want to sell at that price. In symbols: Qd > Qs.

Using the coffee table above, suppose the price is set at $2:

• Quantity demanded at $2: 70
• Quantity supplied at $2: 50
• Shortage size = Qd − Qs = 70 − 50 = 20 cups

Economic meaning: some buyers cannot find the product at the posted price, lines form, and buyers compete for limited units.

Why the “wrong” price creates pressure to change

• Above equilibrium: unsold goods encourage sellers to cut price (or offer deals) to move inventory.
• Below equilibrium: frustrated buyers and rapid sellouts encourage sellers to raise price, and encourage more production.

These pressures are not about morality; they are about incentives created by the mismatch between planned buying and planned selling.

(3) The Adjustment Story in Words and with Arrows on Graphs

A. Adjustment when price is above equilibrium (surplus → price falls)

Word story: Start at a price higher than equilibrium. At that price, sellers bring more to market than buyers purchase. Unsold units accumulate. To reduce inventories, sellers cut prices. As price falls, buyers increase quantity demanded and sellers reduce quantity supplied, shrinking the surplus. The process continues until Qd = Qs.

Arrow logic (how to draw it on the graph):

• Mark a point on the supply curve at the high price: this is Qs.
• Mark a point on the demand curve at the same price: this is Qd.
• At that price, you will see Qs to the right of Qd (more supplied than demanded).
• Draw a horizontal bracket or arrow showing the gap: Surplus = Qs − Qd.
• Then draw a downward arrow on the price axis (or next to the price level) to indicate price tends to fall.
• Finally, draw a small arrow along the curves toward the intersection to show Qd rising and Qs falling as price moves down.

Price above P*  →  Qs > Qd  →  Surplus  →  sellers cut price  →  move toward (P*, Q*)

B. Adjustment when price is below equilibrium (shortage → price rises)

Word story: Start at a price lower than equilibrium. At that price, buyers want more than sellers provide. Some buyers leave empty-handed. Sellers observe quick sellouts and increased willingness to pay. Price rises. As price rises, quantity demanded falls and quantity supplied rises, shrinking the shortage. The process continues until Qd = Qs.

Arrow logic (how to draw it on the graph):

• Mark a point on the demand curve at the low price: this is Qd.
• Mark a point on the supply curve at the same price: this is Qs.
• At that price, you will see Qd to the right of Qs (more demanded than supplied).
• Draw a horizontal bracket or arrow showing the gap: Shortage = Qd − Qs.
• Then draw an upward arrow on the price axis to indicate price tends to rise.
• Draw small arrows along the curves toward the intersection to show Qd falling and Qs rising as price moves up.

Price below P*  →  Qd > Qs  →  Shortage  →  sellers raise price  →  move toward (P*, Q*)

C. Mini practice: read equilibrium, then diagnose surplus/shortage

Example (market for movie tickets):

• Step 1 (equilibrium): Find where Qd = Qs. At $10, both are 80, so P* = 10, Q* = 80.
• Step 2 (above equilibrium): At $12, Qs = 100 and Qd = 60 → surplus of 40 tickets → pressure for price to fall.
• Step 3 (below equilibrium): At $8, Qd = 100 and Qs = 80 → shortage of 20 tickets → pressure for price to rise.