Equilibrium Price

Definition

Equilibrium price is the price at which the quantity supplied and the quantity demanded of a good or service are exactly equal, resulting in a stable market condition where there is no tendency for change. It represents the point where the forces of supply and demand intersect, determining the market-clearing price.

5 Must Know Facts For Your Next Test

1. Equilibrium price is determined by the intersection of the supply and demand curves in a market.
2. At the equilibrium price, the quantity supplied is exactly equal to the quantity demanded, and there is no shortage or surplus in the market.
3. Any price above the equilibrium price will result in a surplus, as the quantity supplied exceeds the quantity demanded, leading to downward pressure on price.
4. Any price below the equilibrium price will result in a shortage, as the quantity demanded exceeds the quantity supplied, leading to upward pressure on price.
5. Equilibrium price is a key concept in microeconomics, as it helps explain how markets function and how prices are determined.

Review Questions

• Explain how the equilibrium price is determined in a market.
  • The equilibrium price in a market is determined by the intersection of the supply and demand curves. At the equilibrium price, the quantity supplied is exactly equal to the quantity demanded, resulting in a stable market condition with no tendency for change. Any deviation from the equilibrium price will create a surplus or shortage, leading to adjustments in price until the market reaches the equilibrium point.
• Describe the impact of a change in supply or demand on the equilibrium price.
  • A change in either supply or demand will shift the supply or demand curve, respectively, leading to a new equilibrium price and quantity. For example, if demand increases, the demand curve will shift to the right, causing the equilibrium price to rise and the equilibrium quantity to increase. Conversely, if supply increases, the supply curve will shift to the right, leading to a decrease in the equilibrium price and an increase in the equilibrium quantity.
• Analyze how the concept of equilibrium price relates to the behavior of businesses and consumers in a market.
  • The equilibrium price is a critical factor in the decision-making processes of both businesses and consumers. Businesses use the equilibrium price as a guide to determine the optimal production levels and pricing strategies to maximize profits. Consumers, on the other hand, use the equilibrium price as a reference point to make informed purchasing decisions, balancing their willingness to pay with the available supply in the market. The concept of equilibrium price helps to ensure that resources are allocated efficiently, with the market-clearing price reflecting the true value of the good or service to both producers and consumers.

Related terms

Supply:

The quantity of a good or service that producers are willing and able to sell at various prices during a given time period.

Demand:

The quantity of a good or service that consumers are willing and able to buy at various prices during a given time period.

Market Equilibrium:

A state of balance between the quantity supplied and the quantity demanded of a good or service, where there is no tendency for change in price or quantity.