Equilibrium is an important concept in micro economics. This concept is generally related with demand and supply of the product.“The situation which shows the balance or equality between two opposite forces is called equilibrium”. E.g. aggregate demand = aggregate supply etc.
Demand and Supply Equilibrium:
Demand and supply equilibrium is also known as market equilibrium. The point where the values of both demand and supply becomes equal will be known as equilibrium point between these two forces. In our daily life equilibrium can be judged in the demand and supply of the good.
Explanation with the help of Table:
Following table explains the equilibrium between demand and supply of the good According to the above table we can see that as the price of the good reaches at 80 the quantity demanded and the quantity supplied of the good becomes equal, this point is equilibrium point between the demand and supply of such good.
Effects of Change in Demand and Supply on Equilibrium:
Any change in demand and supply of the good will indicate the new change in equilibrium between the following points which will cause a change in the price of the good.
Fix Supply but Change in Demand:
If the supply of the good remains constant and a change in demand of such good is noticed then it will cause the change in the price of the good. Increase in demand will cause the increase in price and fall in demand will cause the decrease in price.
Fix Demand but Change in Supply:
If the demand of the good remains constant and a change in supply of such good is noticed than it will affect the price level of that good. Increase in supply will cause decrease in price and decrease in supply will cause the price of the good to increase.