Equilibrium Price

Definition

Equilibrium price is the price at which the quantity demanded and the quantity supplied of a good or service are equal, resulting in a market clearing price where there is no shortage or surplus. This concept is central to understanding the dynamics of supply and demand in markets for goods and services.

5 Must Know Facts For Your Next Test

1. Equilibrium price is the point where the supply and demand curves intersect, indicating the market-clearing price.
2. Changes in either supply or demand will cause a shift in the equilibrium price and quantity.
3. Price ceilings set below the equilibrium price and price floors set above the equilibrium price will result in shortages or surpluses.
4. Efficiency in a market is achieved at the equilibrium price, where the marginal benefit to consumers equals the marginal cost to producers.
5. The elasticity of demand and supply affects how responsive the equilibrium price and quantity are to changes in the market.

Review Questions

• Explain how the concepts of supply and demand interact to determine the equilibrium price in a market.
  • The equilibrium price in a market is determined by the intersection of the supply and demand curves. At the equilibrium price, the quantity demanded by consumers is exactly equal to the quantity supplied by producers, resulting in a market-clearing price with no shortages or surpluses. Any imbalance between supply and demand will cause the equilibrium price to adjust until the market reaches a new equilibrium where the quantity demanded equals the quantity supplied.
• Describe the four-step process for analyzing changes in equilibrium price and quantity.
  • The four-step process for analyzing changes in equilibrium price and quantity involves: 1) Identifying the initial equilibrium price and quantity, 2) Determining the direction of the shift in the supply or demand curve, 3) Applying the supply and demand analysis to determine the new equilibrium price and quantity, and 4) Comparing the new equilibrium to the initial equilibrium to identify the changes in price and quantity. This process allows for a systematic analysis of how changes in market conditions affect the equilibrium.
• Evaluate the impact of price ceilings and price floors on the efficiency of a market and the resulting equilibrium price and quantity.
  • Price ceilings set below the equilibrium price and price floors set above the equilibrium price will distort the market and lead to inefficiencies. Price ceilings create a shortage, as the quantity demanded exceeds the quantity supplied at the artificially low price. Price floors create a surplus, as the quantity supplied exceeds the quantity demanded at the artificially high price. These interventions prevent the market from reaching the equilibrium price and quantity, which is the point of maximum efficiency where the marginal benefit to consumers equals the marginal cost to producers.

Related terms

Demand: The willingness and ability of consumers to purchase a good or service at different prices during a given time period.

Supply: The willingness and ability of producers to offer a good or service for sale at different prices during a given time period.

Surplus: A situation where the quantity supplied exceeds the quantity demanded at the current market price.