Competitive Equilibrium

A competitive equilibrium occurs in a competitive market when there is no tendency for the market price or quantity exchanged of a good or service to change further. This equilibrium is located at the intersection of the market demand curve and the market supply curve in a graph of price against quantity (see Figure 1, opposite). If the market price for aspirin exceeded the equilibrium price, the quantity of aspirin supplied would exceed the quantity demanded; sellers would want to sell more aspirin than consumers wished to buy. Sellers would gradually lower their price, and consumers would gradually increase their quantity demanded, until the market returned to equilibrium. If the market price for aspirin were lower than the equilibrium price, then the quantity of aspirin demanded would exceed the quantity supplied by sellers. In this case consumers would gradually increase the price they offer to sellers, and sellers would gradually increase their quantity supplied, until the quantity of aspirin demanded equaled the quantity supplied at the market clearing price. A competitive market describes a market for a particular good or service that has many buyers and sellers, so individual buyers and sellers have little or no ability to affect prices. Therefore, a competitive equilibrium is reached through the actions of many buyers and sellers; no one buyer or seller can single-handedly influence the equilibrium price and quantity exchanged for the overall market.

Figure 1