Market Equilibrium Fixed Number Of Firms
Understand market equilibrium in a scenario with a fixed number of firms. Explore the meaning of market equilibrium and firm equilibrium, balance between demand and supply.
Mridula Sharma21 Nov, 2023
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Market Equilibrium fixed number of firms is a scenario when the market for a certain product or service reaches a constant and balanced. The number of businesses present in this scenario remains constant and does not change over time.
Let's look at an illustration of a market with a predetermined number of pizza shops to help make things clearer. When the total number of pizzas produced by these five businesses matches exactly the total number of pizzas that local customers want to buy, market equilibrium will occur in a territory with five pizza shops that make and sell pizzas to customers. When this occurs, all of the pizzas made are consumed, leaving no leftover pizzas or disgruntled customers.What is Market Equilibrium?
Market equilibrium is a key concept in economics defining a condition when the demand for a product or service precisely equals its supply. In this situation, there is neither an excess nor a deficit of the commodity, resulting in a steady market environment. In more simple words, picture a situation where vendors are providing a given product, let's say smartphones, and consumers are eager to acquire them at different rates. The market equilibrium happens when the quantity of cell phones that sellers are prepared to supply at a specific price matches the quantity that buyers are ready to acquire at the same price.What is Firm Equilibrium?
Firm equilibrium, in economics, refers to the state in which a company reaches a balanced position, maximizing its profits while minimizing costs. This occurs when a firm optimally matches its production level and pricing strategy with the prevailing market conditions. To elaborate further, imagine a firm that produces and sells a particular product, such as smartphones. Firm equilibrium is achieved when the company determines the right quantity of smartphones to produce and sets an appropriate price for them. This equilibrium point ensures that the firm can sell all its smartphones without facing either excess inventory or unsatisfied customer demand.Demand And Supply and Relationship with Market Equilibrium
Demand:
The quantity of a product or service that customers are willing and able to purchase at different price points within a specific time period is referred to as demand. Buyers frequently desire more things as prices fall, while rising costs tend to dampen consumer demand. Demand is also driven by other variables, including customer tastes, income levels, and the accessibility of alternatives.Supply:
On the other hand, supply reveals how much of an item or service manufacturers are willing and able to deliver to the market at different price points at the same time. Manufacturers are obliged to manufacture more items as prices rise in order to benefit from greater profits, while lower prices may result in reduced output.The Relationship with Market Equilibrium:
Market equilibrium arises at the point where the quantity demanded by consumers equals the quantity supplied by producers. This balance occurs naturally through the interplay of demand and supply forces in the market. When the demand for a product exceeds its supply at a given price, a shortage occurs. In response, suppliers may raise prices to capitalize on increased demand, leading to a reduced quantity demanded and an eventual movement toward equilibrium. Conversely, if the supply of a product exceeds its demand at a particular price, a surplus emerges. To clear this surplus, suppliers may lower prices to stimulate more consumer demand, resulting in an eventual movement towards equilibrium.What is Consumer Surplus?
Consumer surplus is the economic benefit that consumers gain when they purchase a product or service at a price lower than the utmost price they are willing to pay. In other words, it reveals the discrepancy between the price consumers are ready to pay and the true market price they finish up paying. For instance, if a buyer is set to pay $50 for a shirt but discovers it is on sale for $30, their consumer surplus would be $20 ($50 - $30).What is Producer Surplus?
Producer surplus, on the other hand, refers to the economic benefit that producers receive when they sell a product at a price more than the minimum price they are willing to accept. It is the difference between the market price and the lowest price at which producers are willing to sell the goods. For example, if a producer is prepared to sell a bag of apples for $20 but manages to sell it for $30, their producer surplus would be $10 ($30 - $20).What is the Price Floor?
A price floor is the lowest price that a product or service may be sold for, as determined by the government. Its purpose is to protect producers from receiving an unfairly cheap price for their goods. A situation where the price is artificially higher than what the market would typically establish results from the government setting a price floor above the market equilibrium price.What is the Price Ceiling?
In contrast, a price ceiling is the greatest price that a product or service cannot be sold for, as decided by the government. A price ceiling is intended to protect consumers from paying exorbitant prices for essential goods and services. When the government imposes a price cap below the price at which the market is in equilibrium, it artificially lowers the price from what the market would otherwise determine.Price Floors and Market Equilibrium Relation
A surplus is created in the market when a price floor is set higher than the equilibrium price. Producers are willing to provide more goods than buyers are willing to pay for at the higher price imposed by the price floor. There will be excess (unsold items) on the market as a consequence, which might result in wasteful outcomes such as wasting or other waste actions. The price floor must be lowered to align with the market equilibrium price in order to address this surplus and create equilibrium. This will then allow the market to choose the right price and quantity on its own.Price Ceilings and Market Equilibrium Relation
A price ceiling that is set below the market equilibrium price causes the market to become scarce. Customers are willing to buy more of the product than producers are willing to provide at the lower price set by the price ceiling. Due to the market's excess demand (or scarcity), some buyers won't be able to purchase the products. The price ceiling must be changed to match the market equilibrium price in order to end the shortage and restore balance. This will allow the market to choose the ideal price and quantity on its own.Market Equilibrium Fixed Number Of Firms FAQs
Can market equilibrium change over time?
Yes, market equilibrium can change due to shifts in demand or supply caused by factors like changes in consumer preferences, technology, or government policies.
What role do prices play in market equilibrium?
Prices act as the mechanism that signals information about demand and supply conditions, guiding the market toward equilibrium.
What happens if a product's price is above the market equilibrium?
If a product's price is above market equilibrium, a surplus occurs, and sellers may reduce prices to reach equilibrium.
What happens if a product's price is below the market equilibrium?
If a product's price is below market equilibrium, a shortage occurs, and sellers may increase prices to reach equilibrium.
Can external factors disrupt market equilibrium?
Yes, factors like natural disasters, wars, or sudden changes in regulations can disrupt market equilibrium, causing temporary imbalances.
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