# MARKET EQUILIBRIUM AS A SCHEDULE

After you have worked through this section of the learning unit, you should be able to use demand and supply schedules to identify and describe:

• market equilibrium
• excess supply or surplus
• excess demand or shortage

We will now demonstrate market equilibrium with the help of market demand and supply schedules.

The table below shows the price, the market quantity demanded for and the market quantity supplied of fried chicken pieces. In column 5 we indicate whether excess demand, excess supply or market equilibrium exists, while in column 6 we indicate whether there is upward pressure, downward pressure or no pressure at all (neutral) on prices.

### Demand and supply schedules for fried chicken pieces

1 2 3 4 5 6
Price (rand) Quantity demanded Quantity supplied Position Pressure on prices
A 7 1200 4800
B 6 1800 4200
B 5 2400 3600
C 4 3000 3000
D 3 3600 2400
E 2 4200 1800
F 1 4800 1200

Let us first identify the market equilibrium position.

Market equilibrium occurs at a price where the quantity demanded is equal to the quantity supplied.

### Study the above to see if you can identify at what price the quantity demanded is equal to the quantity supplied. In other words, at what price does equilibrium occur? Select the correct answer from the choices below:

If you chose R4, well done, but now let us see if you chose it for the correct reasons.

It is not at R7, because at R7, the producers supply a quantity of 4 800 pieces to the market (as can be seen in column 4). The quantity demanded by consumers, however, is only 1 200 pieces (as indicated in column 3). This is clearly not an equilibrium position.

Market equilibrium is also not at a price of R2. At R2, the producers supply a quantity of 1 800 pieces to the market (as indicated in column 4). The quantity demanded by consumers, however, is more at 4 800 (as indicated in column 3). This is clearly not an equilibrium position.

We could continue trying other prices, but by now, the answer should be obvious.

A state of balance between the quantity supplied by suppliers and the quantity demanded by consumers is only reached at situation D, where the price is R4 and the quantity demanded = the quantity supplied = 3 000.

### Demand and supply schedules for fried chicken pieces

1 2 3 4 5 6
Price (rand) Quantity demanded Quantity supplied Position Pressure on prices
A 7 1 200 4 800
B 6 1 800 4 200
C 5 2 400 3 600
D 4 3 000 3 000 Equilibrium Neutral
E 3 3 600 2 400
F 2 4 200 1 800
G 1 4 800 1 200

In economics, we refer to this point as market equilibrium (where the equilibrium price is R4 and the equilibrium quantity is 3 000). At this point, none of the participants have any incentive to change their behaviour because they are content with the situation.

Here the price is at equilibrium because there is no tendency for the price to fall or rise. In all probability, this equilibrium price will not be reached immediately and oscillation (movement back and forth) around the right level may occur until equilibrium is finally reached and the quantity demanded is equal to the quantity supplied.

### EXCESS SUPPLY

Excess supply occurs when the quantity supplied is more than the quantity demand.

### Demand and supply schedules for fried chicken pieces

1 2 3 4 5 6
Price (rand) Quantity demanded Quantity supplied Position Pressure on prices
A 7 1 200 4 800
B 6 1 800 4 200
C 5 2 400 3 600
D 4 3 000 3 000 Equilibrium Neutral
E 3 3 600 2 400
F 2 4 200 1 800
G 1 4 800 1 200

### Study the above table to see if you can identify positions of excess supply:

Given the market equilibrium price of R4, excess supply occurs at any price higher than R4.

Let us see what happens at a price of R6. At R6, the quantity supplied is 4 200 while the quantity demanded is 1 800. This gives us excess supply or surplus of 4 200 – 1 800 = 2 400. Similarly, at a price of R7, the quantity supplied is 4 800 and the quantity demanded is 1 200 – giving us excess supply of 3 600; at a price of R5, the excess supply is 1 200 (i.e. 3 600 – 2 400).

### Demand and supply schedules for fried chicken pieces

1 2 3 4 5 6
Price (rand) Quantity demanded Quantity supplied Position Pressure on prices
A 7 1 200 4 800 Excess supply
(3 600)
Downward
B 6 1 800 4 200 Excess supply
(2 400)
Downward
C 5 2 400 3 600 Excess supply
(1 200)
Downward
D 4 3 000 3 000 Equilibrium Neutral
E 3 3 600 2 400
F 2 4 200 1 800
G 1 4 800 1 200

Can this excess supply prevail in the long run? The answer is “no”, and the reasoning is as follows:

In a situation of excess supply, even though buyers are still able to buy the quantity of a product they wish to purchase, suppliers become frustrated because they cannot sell the quantity they plan to sell at the given price. To get rid of their surplus, some suppliers start to change their behaviour – by offering a lower price to buyers. Soon other suppliers follow, and the price of the good or service declines. The price of the good will continue to decline until the market reaches equilibrium (where the quantity demanded is equal to the quantity supplied).

Downward pressure is therefore exerted on the price until equilibrium is reached. This information is added to the above table in column 6.

### EXCESS DEMAND

Excess demand occurs when the quantity demanded is more than the quantity supplied. In the market, this occurs when the price is lower than the market equilibrium price.

We can now complete our table by identifying positions of excess demand. Excess demand occurs at any price lower than R4.

Let us see what happens at a price of R1. At R1, the quantity demanded is 4 800, while the quantity supplied is 1 200. This gives us excess demand or shortage of 4 800 – 1 200 = 3 600. Similarly, at a price of R2, the quantity demanded is 4 200 and the quantity supplied is 1 800, giving us excess demand of 2 400. At a price of R3, the excess demand is 1 200 (i.e. 3600 – 2400).

### Demand and supply schedules for fried chicken pieces

1 2 3 4 5 6
Price (rand) Quantity demanded Quantity supplied Position Pressure on prices
A 7 1 200 4 800 Excess supply
(3 600)
Downward
B 6 1 800 4 200 Excess supply
(2 400)
Downward
C 5 2 400 3 600 Excess supply
(1 200)
Downward
D 4 3 000 3 000 Equilibrium Neutral
E 3 3 600 2 400 Excess demand Upward
F 2 4 200 1 800 Excess demand Upward
G 1 4 800 1 200 Excess demand Upward

Can this excess demand prevail in the long run? The answer is “no”, and the reasoning is as follows:

In a situation of excess demand, even though sellers are selling the quantity of the product they wish to sell, buyers become frustrated because they are buying the quantity they plan to buy at the given price. To obtain the good, some buyers start to change their behaviour – by offering a higher price to sellers. Soon, other buyers follow, and the price of the good or service increases. The price of the good will continue to increase until the market reaches equilibrium (where the quantity demanded is equal to the quantity supplied).

Upward pressure is therefore exerted on the price until equilibrium is reached. We can add this information to our table in column 6.

#### Activity

Do the following activity dealing with market equilibrium schedules:

In the table below, the demand and supply schedule for a brand of soft drink at various prices is provided.

Complete the table by indicating in column 4 whether excess demand, excess supply or equilibrium exists, and indicating in column 5 the pressure on prices (downward, upward or neutral).

(no table provided)