Definition
Equilibrium Price
The equilibrium price is the price at which the quantity of goods producers wish to supply matches the quantity demanders want to purchase. At this price, the market is said to be in equilibrium because there is no excess supply or demand. This concept is central to economic theory and results when supply and demand curves intersect. For a manufacturer, achieving the equilibrium price typically maximizes a product’s profitability by balancing costs and revenue effectively.
Examples
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Gasoline Market: In the oil market, if the price per barrel of oil is set so that the amount oil companies produce matches what consumers purchase for their cars and other needs, this reflects the equilibrium price.
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Agricultural Products: During the harvest season, the price of wheat may stabilize at a point where farmers are willing to sell exactly the amount that consumers are willing to buy, indicating a market equilibrium.
Frequently Asked Questions (FAQ)
What causes changes in the equilibrium price?
Changes in the equilibrium price are typically caused by shifts in the supply and demand curves. Factors like consumer preferences, technological advancements, changes in income levels, and costs of production can cause these shifts.
What happens if the market price is above the equilibrium price?
If the market price is above the equilibrium price, there will be excess supply, or a surplus, as producers will supply more than consumers are willing to buy at that price. Over time, the surplus typically pushes the price down toward equilibrium.
What happens if the market price is below the equilibrium price?
If the market price is below the equilibrium price, there will be excess demand, or a shortage, as consumers will demand more than producers are willing to supply at that price. This shortage typically pushes the price up toward equilibrium.
Can the equilibrium price change?
Yes, the equilibrium price can change as the factors affecting supply and demand change. An increase in demand or a decrease in supply typically raises the equilibrium price, while a decrease in demand or an increase in supply lowers it.
Related Terms
Supply Curve
A supply curve is a graphical representation of the relationship between the price of a good and the quantity supplied.
Demand Curve
A demand curve is a graphical representation of the relationship between the price of a good and the quantity demanded.
Market Equilibrium
Market equilibrium refers to a situation where the supply of a good matches demand at a consistent price, leading to a stable economy.
Surplus
Surplus, in economics, occurs when the quantity supplied exceeds the quantity demanded at a given price.
Shortage
A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price.
Online Resources
- Investopedia - Equilibrium Price
- Economics Help - Market Equilibrium
- Khan Academy - Equilibrium, Surpluses, and Shortages
Suggested Books for Further Study
- “Principles of Economics” by N. Gregory Mankiw
- “Economics” by Paul Samuelson and William Nordhaus
- “Microeconomics: Principles, problems, & policies” by Campbell R. McConnell, Stanley L. Brue, and Sean Flynn
Fundamentals of Equilibrium Price: Economics Basics Quiz
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