Market Equilibrium:  

Market equilibrium is reached when supply and demand are balanced such that the market price and the quantity exchanged (amount actually sold) are under no market pressure to change. The market equilibrium price is a price at which the quantity supplied and the quantity demanded are equal, so that there is no shortage or surplus that pushes toward a change in price. Surplus and shortage is caused when there is an inequilibrium between the quantity demanded and the quantity supplied. When the quantity demanded equals the quantity supplied, then market equilibrium is reached. When the quantity demanded is greater than the quantity supplied, consumers will want to buy more than is what is available, thus causing a shortage. When the quantity demanded is less than the quantity supplied, producers want to sell more than consumers will buy at a given price, creating a surplus. When there are shortages, prices will increase, while surpluses cause prices to decrease.

The market equilibrium changes as a result of a shift in the demand curve or the supply curve. Therefore, the same factors that cause shifts in supply and demand are also the causes of the change in the market equilibrium. When the demand curve shifts, the market price and market quantity exchanged move in the same direction (both rise and both fall).

When the supply curve shifts, market price and market quantity exchanged move in the opposite directions (one rises while the other falls). Thus when there is an increase in demand, it leads to an increase in the equilibrium price and quantity, and when there is a decrease in demand, then it leads to a decrease in the equilibrium price and quantity. An increase in supply leads to a decrease in the equilibrium price and an increase in the equilibrium quantity, whereas a decrease in supply leads to an increase in the equilibrium price and a decrease in the equilibrium quantity.