Market equilibrium

Posted 2023-02-10 14:23:05

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Key points

Supply and demand curves intersect at the equilibrium price. This is the price at which we would predict the market will operate.

Where demand and supply intersect

Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market.

The demand curve, D, and the supply curve, S, intersect at the equilibrium point E, with an equilibrium price of 1.4 dollars and an equilibrium quantity of 600. The equilibrium is the only price where quantity demanded is equal to quantity supplied. At a price above equilibrium, like 1.8 dollars, quantity supplied exceeds the quantity demanded, so there is excess supply. At a price below equilibrium, such as 1.2 dollars, quantity demanded exceeds quantity supplied, so there is excess demand.

We can also find the equilibrium price by looking at a table.

Price per gallon	Quantity supplied in millions of gallons	Quantity demanded in millions of gallons
dollar sign, 1, point, 00	500	800
dollar sign, 1, point, 20	550	700
start color #df0030, dollar sign, 1, point, 40, end color #df0030	start color #df0030, 600, end color #df0030	start color #df0030, 600, end color #df0030
dollar sign, 1, point, 60	640	550
dollar sign, 1, point, 80	680	500
dollar sign, 2, point, 00	700	460
dollar sign, 2, point, 20	720	420

The equilibrium price is the only price where the plans of consumers and the plans of producers agree—that is, where the amount consumers want to buy of the product, quantity demanded, is equal to the amount producers want to sell, quantity supplied. This common quantity is called the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price.

The word equilibrium means balance. If a market is at its equilibrium price and quantity, then it has no reason to move away from that point. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity.

Check out this video to see a discussion of how the interaction between supply and demand leads to an equilibrium price.