Market Equilibrium

Alfred Marshall · 1890 · Principles of Economics, Book V

When price is above equilibrium, sellers have surplus: they cut prices. When price is below equilibrium, buyers face shortage: they bid prices up. The market converges to the price where supply equals demand. Marshall called this the "true equilibrium price."

Convergence to equilibrium

The invisible hand is just two pressures. Surplus pushes price down. Shortage pushes price up. The equilibrium is the only price where neither pressure exists.

Scheme

; Market convergence simulation
; Demand: Qd = 100 - 2P
; Supply: Qs = 3P
; Equilibrium: P* = 20, Q* = 60

(define (demand p) (- 100 (* 2 p)))
(define (supply p) (* 3 p))

; If price is wrong, adjust toward equilibrium
(define (adjust price step)
  (let ((qd (demand price))
        (qs (supply price)))
    (cond
      ((> qs qd) (- price step))   ; surplus -> price falls
      ((> qd qs) (+ price step))   ; shortage -> price rises
      (else price))))               ; equilibrium

; Simulate convergence from P=35 (too high)
(display "Starting at P=35 (surplus):")
(newline)
(let loop ((p 35) (n 0))
  (when (< n 6)
    (display "  P=")
    (display p)
    (display "  Qd=")
    (display (demand p))
    (display "  Qs=")
    (display (supply p))
    (display (if (> (supply p) (demand p)) " surplus"
              (if (> (demand p) (supply p)) " shortage" " EQUILIBRIUM")))
    (newline)
    (loop (adjust p 3) (+ n 1))))

Price ceilings and floors

Governments sometimes fix prices. A price ceiling below equilibrium creates shortage (rent control). A price floor above equilibrium creates surplus (minimum wage, agricultural price supports). Neither eliminates the underlying supply and demand forces; they redirect them into queues, black markets, or waste.

Scheme

; Price controls: ceiling and floor
(define (demand p) (- 100 (* 2 p)))
(define (supply p) (* 3 p))

(define p-eq 20)
(define q-eq 60)

; Price ceiling at $15 (below equilibrium)
(define ceiling 15)
(define qd-ceil (demand ceiling))
(define qs-ceil (supply ceiling))

(display "Price ceiling at $15:")
(newline)
(display "  Qd = ")
(display qd-ceil)
(display ", Qs = ")
(display qs-ceil)
(newline)
(display "  Shortage of ")
(display (- qd-ceil qs-ceil))
(display " units")
(newline)
(newline)

; Price floor at $30 (above equilibrium)
(define floor-price 30)
(define qd-floor (demand floor-price))
(define qs-floor (supply floor-price))

(display "Price floor at $30:")
(newline)
(display "  Qd = ")
(display qd-floor)
(display ", Qs = ")
(display qs-floor)
(newline)
(display "  Surplus of ")
(display (- qs-floor qd-floor))
(display " units")

Key terms

Term	Meaning
Surplus	Quantity supplied exceeds quantity demanded (price too high)
Shortage	Quantity demanded exceeds quantity supplied (price too low)
Price ceiling	Legal maximum price (creates shortage if below equilibrium)
Price floor	Legal minimum price (creates surplus if above equilibrium)

Neighbors

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