Competitive market equilibrium is when supply and demand are balanced, resulting in a stable price for a product or service. It is achieved in a free market with multiple producers and consumers. Changes in supply and demand levels can affect the equilibrium, and it cannot be achieved in a market controlled by a monopoly or centralized government.
Competitive market equilibrium is an economic concept that details the relationship between consumer demand and producer supply. At some point, supply equals demand and constitutes the price for a particular good or service, and this point is known as equilibrium. If there are changes in supply or demand levels, the price will rise or fall in accordance with these changes until equilibrium is reached again. The concept of competitive equilibrium in the market is based on a free market with many companies selling goods in an attempt to make a profit, as opposed to a monopoly with one company controlling production or a market controlled by a centralized government.
Free markets are those economic markets where a multitude of producers create goods and services that people can buy. Consumers in these markets can choose which products to purchase and what price they are comfortable paying for those products. All of this activity will result in a point where price levels stabilize based on supply and demand. At this point, competitive market equilibrium is achieved.
The easiest way to see how competitive market equilibrium is achieved is to study a graph that represents the production levels of a particular product, the prices at which they are sold, and the consumer demand for this product. The lines on the chart representing supply and demand can rise or fall as prices change. At some point, these lines will intersect, resulting in the balance between supply and demand.
Changes in supply and demand levels can affect the competitive balance of the market. For example, a sudden increase in demand for a particular product will cause companies to ramp up production to meet excess demand. To meet the costs of increased production, companies will raise product prices. At some level, higher prices will keep consumers from buying and demand will decrease, leaving a glut. Prices will fall again until a new equilibrium is reached.
Such a harmonious relationship between supply and demand exists only in a competitive environment. Consequently, competitive market equilibrium will not be achieved in a market that is not perfectly competitive. Any economy in which output and prices are set by a centralized government is out of balance. Furthermore, a market dominated by one or a few firms will not be in equilibrium, especially since the dominant firms will have greater financial leverage to set the prices that consumers must accept.
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