What is Equilibrium Price?
The equilibrium price can be defined as the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market intersect. It can also be seen as the interaction between the demand and supply in the free market that is used to determine the costs for a goods or service. In other words, the equilibrium price is achieved when the market supply and demand balance each other as a result of which prices become stable. Generally speaking, when there is too much supply for goods or services, the price goes down, which results in higher demand. In the light of this therefore, the balancing effect of supply and demand results in a state of equilibrium. Please note that in order to determine the equilibrium price, you have to figure out at what price the demand and supply curves intersect.
Equation and Example
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The supply and demand curves intersect at P* and Q*, which are the equilibrium price and quantity.
It’s one thing to be able to identify the equilibrium price on a graph, but you should also be comfortable figuring out the price algebraically. Here are the supply and demand curve formulas for this example: Qd = 50 – 5P and Qs = 5 + 10P
The supply curve is denoted as Qs and the demand curve is denoted as Qd. They are both written as a function of price. If you happen to get formulas that are price as a function of quantity, then you would want to rearrange the formula to match this format.
How to Determine Equilibrium Price with Graph
Business executives face an economic dilemma in determining price: Customers want low prices, and executives want high prices. Markets resolve this dilemma by reaching a compromise price. Please note that the compromise price is the one that makes quantity demanded equal to quantity supplied. At that price, every customer who is willing and able to buy the good can do so. And every business executive who wants to sell the good at that price can sell it…
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