Market Equilibrium
Let's bring demand and supply together and clear the market.
Definition: the market equilibrium is when the market demand and market supply are equal. What is being produced by the firms is equal to what is being demanded by consumers. The market equilibrium price is the price which achieves this and clears the market.
MARKET EQUILIBRIUM
The diagram above represents the market for smartphones. You can see that the equilibrium price is £500. It is priced at the point of intersection of supply and demand curves. The price of £500 results in 1 million smartphones being sold in the market. Firms have produced 1 million units and consumers are only demanding 1 million units. The market has been cleared.
EXCESS SUPPLY
From the diagram you can see the equilibrium price of £500 still stands. If the market priced smartphones at £750, there would be an excess supply. You can see this from points A to B. £750 results in 500,000 units being demand by consumers. £750 also results in 1.5 million units being supplied by producers. Therefore, there is 1 million too many units.
EXCESS DEMAND
From the diagram you can see the equilibrium price of £500 still stands. If the market priced smartphones at £250, there would be an excess demand. You can see this from points A to B. When the price is £250, firms will want to produce only 500,000 units. You can see that on the supply curve. However, consumers are drawn to the cheap price of the smartphones and demand 1.5 million units. You can see this on the demand curve. Therefore, consumers demand 1 million too many units and we are left with a shortage.
In summary:
You should know the definition of a market equilibrium and equilibrium price level.
You should know how to draw a market equilibrium.
You shoud know how to draw excess supply and excess demand on a diagram.
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