What is Equilibrium Price?
Equilibrium occurs when there is a state of no change. This tells us that equilibrium price is a price where both the seller and the buyer are in the position of no change.
Theoretically speaking, at this price,
Amount of goods demanded by the buyers = Amount of goods supplied by the sellers
Therefore, both the demand and supply work in synchronisation with the equilibrium price. In other words, the equilibrium price is where the state of the market supply and demand get equally balanced, which also then makes the prices for that certain product steady.
Cause and Results
Generally, when this happens, prices of these goods go down and this happens because of an oversupply of goods and services, this as result, increases the demand for these goods and services.
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Here in the diagram above, we can observe that the equilibrium price shows through the intersection of the supply and demand curve in the equilibrium price graph.
Equilibrium Price is also known as market-clearing price.
Characteristics
The equilibrium of a market has certain major characteristics:
The behaviour of the agents is consistent.
Agents are not given any incentives in exchange for a change in behaviour.
The equilibrium price formula calculates the equilibrium outcome that is governed by a dynamic process.
Example
We can take an example to understand the definition of Equilibrium Price better:
If we calculate this table with the help of the equilibrium price formula:
In the given table, the quantity of demand is equal to the supply at the price of Rs. 60. This makes the Rs. 60 price as the equilibrium price. If instead of this price, we take any other price from the table, there can be a shortage or a surplus.
The surplus would occur because if we take any value lower than 60, the quantity of supply would be more than the demanded quantity.
The shortage would occur if we take a value of more than 60, the amount of the demand would be bigger than the available supply.
Equilibrium Price Definition
When the quantity of supply of goods matches the demand for goods, it is called the equilibrium price. The market is said to be in a state of equilibrium when the main experience is in the phase of consolidation or oblique momentum. Then, it can be concluded that demand and supply are comparatively equal. Equilibrium price examples are discussed below as well.
Equilibrium price definition can be understood this way, the neutral point of price where both the buyers and sellers are satisfied. An equilibrium price example: at equilibrium, there is neither scarcity nor state of abundance unless there is a change in the elements of demand and supply. With the increase or decrease in demand and supply, inverse behaviour occurs.
Finding the Equilibrium Price
We can find the equilibrium price by using the equilibrium price formula. These are the steps:
Calculate the supply function
Calculate the demand function
Set the equal amount of quantities for the demand and supply and solve these to get an equilibrium price
Put this equilibrium price into a supply function
Check the result by putting the equilibrium price into the demand function
Equilibrium Price Example
Let’s take an example for better understanding of equilibrium price definition:
Calculating with the Help of the Equilibrium Price Formula:
In this table, the quantity of demand is the same as the supply at the price of Rs. 60. Hence, the price of Rs. 60 is the equilibrium price. If we take any other value, there can be either shortage or surplus. Particularly, for any value lower than Rs 60, the quantity of supply is more than demanded, hence there is a surplus. Similarly, for any value more than Rs. 60, the amount of demand is more than the supply, creating a shortage. This type of question can also be solved by the equilibrium price graph.
This equilibrium price example shows that an equilibrium price can change the quantity of demand and supply.
More About Equilibrium Theory
A state of no change is called equilibrium. So clearly, at the equilibrium price, both buyer and seller are in the position of no change. Theoretically, at this price, the amount of goods demanded by buyers is equal to the amount supplied by the sellers. Hence, both demand and supply work in synchronization with the equilibrium price; this is an equilibrium price example. Equilibrium is the state of balancing of market supply and demand, and consequently, prices become steady. Generally, the reason for prices to go down is an oversupply of goods or services, resulting in higher demand for goods or services. Equilibrium price definition explains the state of equilibrium is the result of the balancing effect of demand and supply.
The equilibrium price is showing through the intersection of the demand and supply curve in an equilibrium price graph. It is also called the market-clearing price. The determination of the market price is the purpose of microeconomics, and hence microeconomic theory is also known as price theory.
Equilibrium Price Graph
Here, given below is a graphical representation of demand and supply at an equilibrium price which validates the equilibrium price definition.
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How does a Supply Shock Affect Equilibrium Price and Quantity?
A supply shock affects equilibrium price and quantity positively and negatively. Supply shock indicates a sudden good change that means if it is a positive shock, the equilibrium price and quantity go up, and if it is a negative shock, it will be vice versa.
How do Supply and Demand Affect Equilibrium Price?
With the upward shift, the supply decreases, the equilibrium price increases and demand stays stable. With the downward change in supply, the supply increases and the equilibrium price falls.
With the upward shift, demand increases, equilibrium price increases and supply stays stable. With the downward change in demand, demand decreases, equilibrium price decreases and supply remains steady.
It can be calculated using the equilibrium price formula.
Did you know?
The equilibrium theory was introduced and developed by a French economist, Leon Walras, in the late 19th century.
Walras used this theory to multi-market settings by bringing in another good into his model, which then helped him to calculate price ratios.
The contribution of Walras' to the theory helped economics to grow into a study that includes mathematical analysis at its centre.
FAQs on Equilibrium Price: Determination and Importance
1. What is the difference between Demand and Supply?
The difference between demand and supply is as follows:
The equilibrium between the quantity and price for goods at a particular time is called demand. Conversely, the equilibrium between the amount and value of commodities is supply.
The curve of demand slopes downward and the curve of supply is upward sloping.
Demand and supply have an indirect and direct relationship with the price respectively.
Demand and supply have an inversely proportional relationship with each other.
The taste of customers and his preference for a particular good is represented by demand. On the other hand, the supply represents the number of services offered by producers in the market.
2. What are the factors affecting Demand and Supply?
These are the following factors which affect demand and supply:
Price of the goods: If the price rises then, the demand decreases. In this way, the supply increases, and demand decreases. If prices fall then demand increases automatically.
Price of inputs: If the cost of production is increasing, it affects both demand and supply directly.
The price of related goods.
The substitutes of products: If the price of a commodity rises, people look for an alternate cheaper product, which affects the demand and supply of both such products.
The consumers’ choices and inclinations, and
Increase in income of the consumer.
3. How did the Equilibrium Theory originate?
The balance in the supply and demand levels that are competing in different markets ultimately create a price equilibrium, this phenomenon is known as Equilibrium Theory.
The Equilibrium Theory was first introduced and developed by a French economist named Leon Wakras in the late 19th Century.
He utilized this theory in the existing multi-marketing settings and helped himself in calculating price ratios.
This vital contribution by Wakras along with keeping mathematical analysis at its centre helped economists in the future to develop further concepts in the field of economics.
4. Do the Supply and Demand affect the Equilibrium Price?
Yes, they do. This can happen due to these certain situations:
There is an upward shift, the demand stays stable, whereas the price increases, and as result, the equilibrium price also increases.
With the downward change in supply, the equilibrium price falls because the price decreases.
With the upward shift where the demand increases, the supply stays stable and the equilibrium price increases.
With the downward change in demand, supply remains steady, and the demand and equilibrium price decrease.
We can calculate these using the equilibrium price formula.
5. Do the consumers and producers agree on an equilibrium price?
Yes, the equilibrium price is the only price in the market where both, the plans of the producers and the plans of the consumers agree on. This means that the amount of product the consumers want to buy (Demanded Quantity) is equal to the amount of that product the producers want to sell (Supplied Quantity). This common amount of quantity is what is known as the Equilibrium Quantity.
Equilibrium Quantity is the phenomenon where there is neither a surplus nor a shortage of a product in the market.
6. Does a Supply Shock affect the Equilibrium Price and Quantity?
Yes, a supply shock does affect the equilibrium price and quantity, sometimes positively and sometimes negatively.
A supply shock is an event that is unexpected and changes the supply and equilibrium price of a product or a commodity resulting in a sudden change in its price. In other words, supply shock, which indicates that there is a sudden positive change, is called a positive shock. In this, equilibrium price and quantity go up.
If it is a Negative Shock, it is vice-versa.
7. Can I find more concepts related to Economics on Vedantu?
At Vedantu, we provide the students with all the important concepts in the subject of Economics that are needed to be studied by them to ace their exams. This particular concept was about equilibrium in price.
To learn more about such intriguing economic and mathematics-related topics, you can check out the abundant study material available at Vedantu along with living-learning and downloadable PDFs containing all the concepts, answers for the textbook questions, important questions and much more, right here on our app and website.
