The market equilibrium is the price and quantity where the demand and supply for a good or service is equal. In a free-market economy, this point should always occur due to the market forces which act on both consumers and producers.
If the price for a good is higher than the market equilibrium, market forces dictate that there will be a surplus of the good: suppliers will have an incentive to supply more, whereas consumers will demand less. Over time, a surplus in the market is unsustainable and equilibrium will be restored as some firms will be forced out of the market.
If the price of a good is lower than the market equilibrium, market forces dictate that their will be a shortage of the good: suppliers will be inclined to supply less, whereas consumers will demand more. Over time, equilibrium will be restored as firms will join the market in order to satisfy the excess demand.
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Key terms:
Surplus – when the quantity demanded of a good is less than the quantity supplied.
Shortage – when the quantity demanded of a good is more than the quantity supplied.