The Dynamics of Supply and Demand in Achieving Market Equilibrium

Abstract

This study examines the dynamics of demand and supply in achieving market equilibrium using a simultaneous equation model estimated through the Two Stage Least Squares (2SLS) method. The analysis investigates how price, income, production costs, technology, and policy interventions interact in determining equilibrium price and quantity. The results confirm the validity of the law of demand and the law of supply, as indicated by the expected signs and statistical significance of the estimated coefficients. Elasticity analysis shows that both demand and supply are relatively inelastic, implying that external shocks tend to produce stronger price adjustments than quantity changes. Simulation of income, cost, and policy shocks demonstrates that market equilibrium is dynamic and adjusts gradually through price mechanisms. Diagnostic tests confirm that the model is econometrically robust and structurally stable. The findings highlight the importance of structural and productivity-enhancing policies in maintaining market stability and improving long-term economic welfare.