Market equilibrium occurs when the quantity that buyers want to buy (demand) equals the quantity that sellers want to sell (supply). At this point, the market price is stable and there is no pressure for it to rise or fall. Think of it as a perfectly balanced seesaw: the weight on each side is the same, so the seesaw stays level.
In symbols: \$Qd = Qs\$ and the corresponding price is \$P^*\$.
Disequilibrium happens when demand does not equal supply. It can be a surplus (more supply than demand) or a shortage (more demand than supply). The market price will then change until equilibrium is restored.
Imagine a crowded fair where stalls (sellers) offer lemonade and kids (buyers) want it. The price of lemonade is set by how many kids want it at each price and how many stalls are ready to sell. The interaction of the two curves determines the final price and quantity sold.
The demand curve shows the relationship between price and quantity demanded. As price falls, quantity demanded rises, and vice versa.
| Price ($) | Quantity Demanded (units) |
|---|---|
| 10 | 30 |
| 8 | 50 |
| 5 | 80 |
The supply curve shows the relationship between price and quantity supplied. As price rises, quantity supplied rises, and vice versa.
| Price ($) | Quantity Supplied (units) |
|---|---|
| 5 | 20 |
| 8 | 45 |
| 10 | 70 |
Example: If \$Qd = 100 - 2P\$ and \$Qs = 20 + 3P\$, then:
\$100 - 2P = 20 + 3P\$
→ \$5P = 80\$ → \$P^* = 16\$.
→ \$Q^* = 100 - 2(16) = 68\$ units.