when market demand for a goods is equal to its market supply called market equilibrium. Assumption - 1- positive relation between price and supply. 2- negative relation between price and demand.

Market Equilibrium under Perfect Competition

Market equilibrium refers to a state of balance in a market where the quantity demanded by consumers equals the quantity supplied by producers at a specific price level. Under perfect competition, market equilibrium occurs when the forces of demand and supply interact to determine the equilibrium price and quantity in the market.

Demand and Supply

In a perfectly competitive market, both buyers and sellers are price takers, meaning they have no influence over the market price. The demand curve represents the quantity of a product that consumers are willing and able to buy at various price levels, while the supply curve illustrates the quantity that producers are willing and able to sell at different price levels.

Equilibrium Price and Quantity

The market equilibrium is determined by the point of intersection between the demand and supply curves. This point is often referred to as the equilibrium price and quantity. At this point, the quantity demanded is equal to the quantity supplied, and there is no excess demand or supply in the market.

Key Points:
- In a perfectly competitive market, the equilibrium price and quantity are determined solely by the forces of demand and supply.
- The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
- The equilibrium quantity is the quantity bought and sold at the equilibrium price.

Market Adjustment Process

If the market price is above the equilibrium price, there will be excess supply in the market. Producers will find it difficult to sell all their products, leading to a build-up of inventory. In response, producers will lower their prices to attract more buyers, which will eventually decrease the quantity supplied and increase the quantity demanded. This process continues until the market reaches the equilibrium price.

On the other hand, if the market price is below the equilibrium price, there will be excess demand in the market. Consumers will compete to buy the limited supply, leading to upward pressure on prices. Producers will respond by increasing their prices to maximize profits, which will eventually decrease the quantity demanded and increase the quantity supplied. This process continues until the market reaches the equilibrium price.

Key Points:
- Excess supply leads to downward pressure on prices, while excess demand leads to upward pressure on prices.
- The market adjustment process ensures that the market reaches equilibrium by balancing demand and supply.

Efficiency of Market Equilibrium

Market equilibrium under perfect competition is considered efficient because it leads to the optimal allocation of resources. At the equilibrium price, resources are allocated to the production of goods and services that are most valued by consumers. This allocation maximizes consumer satisfaction and producer profits while minimizing waste and inefficiency.

Key Points:
- Market equilibrium leads to the efficient allocation of resources.
- It maximizes consumer satisfaction and producer profits.

In conclusion, market equilibrium under perfect competition occurs when the quantity demanded equals the quantity supplied at a specific price level. The equilibrium price and quantity are determined by the interaction of demand and supply forces. The market adjustment process ensures that the market reaches equilibrium by eliminating excess demand or supply. Market equilibrium is efficient as it leads to an optimal allocation of resources, maximizing consumer satisfaction and producer profits.