Equilibrium Price

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What is Equilibrium Price?

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. 


Characteristics of the Equilibrium of Market

  1. Consistency in the behaviour of agents.

  2. No incentives are to be given to agents to change behaviour.

  3. There is a dynamic process governing the equilibrium outcome that is calculated by the equilibrium price formula.


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. 


Equilibrium Price Example

Let’s take an example for better understanding of equilibrium price definition:

Price

Quantity Demanded (Kg)

Quantity Supplied (Kg)

Surplus (Kg)

Shortage (Kg)

100

5

50

45


90

12

41

29


80

18

35

17


70

22

28

6


60

25

25

0

0

50

34

22


12

40

41

18


23

30

47

14


33

20

50

9


41

10

55

5


50

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.


How to find Equilibrium Price?

A market reaches its equilibrium when the demand equals the supply, which is when the demand and supply curve intersect in the equilibrium price graph.

The equilibrium price formula executes a five steps process.

  1. Calculate the supply function

  2. calculate the demand function

  3. Set equal quantities for demand and supply and solve to get an equilibrium price

  4. Put the equilibrium price into the supply function

  5. Check the result by putting equilibrium price into the demand function

It is called the equilibrium price formula.


Equilibrium Price Graph

Here, given below is a graphical representation of demand and supply at an equilibrium price which validates the equilibrium price definition.

[Image will be uploaded soon]

*Equilibrium price graph


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.

FAQ (Frequently Asked Questions)

Q1. What is the difference between Demand and Supply?

Ans: 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?

Ans: 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.