Equilibrium Price

Published Dec 24, 2022

Definition of Equilibrium Price

The equilibrium price is the price at which the quantity of a good or service demanded by consumers is equal to the quantity supplied by producers. That means it is the price at which the market is in balance, and there is no tendency for the price to change.

Example

To illustrate this, let’s look at the market for apples. Suppose the current price of apples is USD 1.00 per pound. At this price, consumers are willing to buy 10 pounds of apples, while producers are willing to supply 10 pounds. Thus, the quantity demanded at that price is equal to the quantity supplied, and the market is in equilibrium.

Now imagine the price of apples increasing to USD 1.50 per pound. At this price, consumers are only willing to buy 8 pounds of apples, while producers are willing to supply 12 pounds. As a result, the quantity demanded is less than the quantity supplied, and the market is not in equilibrium.

Why Equilibrium Price Matters

Equilibrium Price is an important concept in economics because it helps us understand how markets work. It shows us that the interaction between supply and demand determines the price of a good or service. It also helps us understand why prices can change over time. For example, if the demand for a good or service increases, the equilibrium price will also increase. Similarly, if the supply of a good or service increases, the equilibrium price will decrease.