Equilibrium, Excess Demand, Excess Supply

A perfectly competitive market comprises of buyers and sellers who are piloted by their self-interested motivations. Focus of the consumers are to maximise their corresponding proclivity and that of the enterprises are to maximise their respective profits. Both the customers and enterprises objectives are adaptable in the equilibrium.

An equilibrium is defined as a situation where the plans of all customers and enterprises in the market place match and the market clears. In equilibrium, the average quantity that all enterprises wish to sell coequals the amount that all the customers in the market wish to purchase; in other words, market supply equals to market demand. The cost price at which equilibrium is reached is called equilibrium price and the quantity purchased and sold at this cost price is called equilibrium quantity.

If at a cost price, market supply is greater than market demand, we say that there is an excess supply in the market at that cost price and if market demand exceeds market supply at a cost price, it is said that excess demand exists in the market place at that cost price. Hence, equilibrium in a perfectly competitive market that can be defined alternatively as zero excess demand-zero excess supply situation. Whenever market supply is not equal to market demand, and therefore the market is not in equilibrium, there will be a propensity for the cost price to differ.

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