ZERO COUPON BOND: Also termed a zero bond, a bond that does not pay interest, in which the return is generated by the difference between the purchase price and the face value paid at maturity. Because they do not pay interest, zero coupon bonds are sold at a discount. For example, a $10,000 zero coupon bond that matures in one year, would generate a 10% return if it sold at a discount of $9,000.
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The state of equilibrium that exists when the opposing market forces of demand and supply achieve a balance with no inherent tendency for change. Once achieved, a market equilibrium persists unless or until it is disrupted by an outside force, especially the demand and supply determinants. A market equilibrium is indicated by equilibrium price and equilibrium quantity. In general, equilibrium is the balance of opposing forces. For market equilibrium, the opposing forces are demand and supply. Buyers seeking to buy at a lower price and sellers seeking to sell at a higher price. The balance of these two forces generates a price and a quantity that are mutually agreeable to both sides.
The Imperial Forces of Demand and SupplyA market equilibrium is comparable to a robust tug-of-war between two equally matched teams of burly lumberjacks, such as those employed by the Natural Ned Lumber Company. On one end of the rope is a group of ten burly lumberjacks in red plaid shirts. On the other end is a group of ten burly lumberjacks in blue plaid shirts. As the red burly team tugs and pulls they are matched tug for tug and pull for pull by the blue burly team. The yellow flag marking the center of the rope budges nary an inch. The two opposing forces of burly red and burly blue balance out. The result is equilibrium.
Except for the plaid shirts, market equilibrium works in much the same way.
- Demand: Wearing red flannel, the demand "force" is buyers seeking to pay the lowest possible price for a good. In particular, the demand force is the demand curve, which embodies the law of demand. However, it is not just the demand curve that is this force, but the whole demand space beneath the demand curve. Buyers are willing to go as high as the demand curve, but would really, really prefer to go lower.
- Supply: In the blue corner, the supply "force" is sellers seeking to receive the highest possible price. This is best indicated by the supply curve, which embodies the law of supply. And like demand, it is not the supply curve itself, but the entire supply space above the curve. Sellers are willing to go as low as the supply curve, but would really, really prefer to go higher.
Striking A Balance
Market equilibrium is the balance between buyers trying to move the price down and sellers trying to move the price up. When the two forces are in balance, the "yellow flag" or price does not budge. The unmoving price is not actually yellow, but it is the equilibrium price.
There is more, however, to equilibrium price and quantity than yellow flags. The equilibrium price is also equal to BOTH the demand price and supply price. Moreover, the equilibrium quantity is equal to BOTH the quantity demanded and quantity supplied.
- Specifically equilibrium price is the price that exists when the market is in equilibrium.
- Paired with the equilibrium price, is the equilibrium quantity, which is the quantity exchanged between buyers and sellers when the market is in equilibrium.
As a matter of fact, equilibrium price and equilibrium quantity result when the demand and supply prices are equal AND the quantities demanded and supplied are equal. And this is ONLY achieved at the intersection of the demand and supply curves. This market equilibrium is illustrated in the accompanying market diagram.
Efficiency and the Invisible Hand of CompetitionEconomists like market equilibrium almost as much as a box of Double-Dot Caramel Nougat Clusters. The reason is efficiency. The forces of demand and supply, almost as if guided by an invisible hand, efficiently allocate society's scarce resources when they achieve market equilibrium. Efficiency, however, requires a competitive market--a market with large numbers of buyers and sellers such that neither side is able to influence the price or exchange process and the absence of market failures such as externalities.
A competitive market is comparable to a tug-of-war in which each team consists of a hundred thousand flannel-shirted lumberjacks. Should any single lumberjack from either side leave their team to climb a pine tree, fell a redwood, or pursue other lumberjacking activities, then the tug-of-war is unaffected. One lumberjack, one buyer, one seller, does not affect a competitive market.
If, however, the tug-of-war teams consist of only three lumberjacks each, then the absence or presence of a one can make a difference. Likewise the efficiency balance in a market can be easily comprised if the number of competitors is limited.
Those Disrupting DeterminantsMarket equilibrium perpetually persists unless or until disrupted by an outside force. The lumberjack tug-of-war is disrupted if three-fourths of the blue team suddenly contract dutch elm disease or if several key members of the red team decide to leave the lumberjacking profession, become accountants, and move to Akron, Ohio.
The demand determinants and supply determinants are the prime disrupters of market equilibrium. When they change, the demand and supply curves shift, the original equilibrium price and quantity are no longer equilibrium, and the market is out of balance with surpluses and shortages.
Fortunately, a market equilibrium is a stable equilibrium. Any determinant-triggered disruption that results in a surplus or shortage induces the price to change to restore equilibrium. If the market wavers from equilibrium, the demand and supply forces bring it back. If the price is too high or too low, that is, above or below the equilibrium price, then the price automatically returns it to the equilibrium.
In either situation, the price returns to the equilibrium.
- A high price creates a surplus, which means sellers are not able to sell all that they want at the existing price. To eliminate this surplus, they force the price lower.
- A low price creates a shortage, which means buyers are not able to buy all that they want at the existing price. To eliminate this shortage, they force the price higher.
MARKET EQUILIBRIUM, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 21, 2024].
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