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October 15, 2018 

AmosWEB means Economics with a Touch of Whimsy!

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REAL ECONOMY: The physical side of the economy dealing with goods, services and resources. This side is concerned with using resources to produce the goods and services that make the satisfaction of wants and needs possible. This should be contrasted with the paper economy, or financial side of the economy.

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EQUILIBRIUM PRICE:

The price that exists when a market is in equilibrium. Equilibrium price is simultaneously equal to both the demand price and supply price and it is the price that equates the quantity demanded and quantity supplied. In a market graph, the equilibrium price is found at the intersection of the demand curve and the supply curve. Equilibrium price, also commonly referred to as the market-clearing price, is one of two equilibrium variables. The other is equilibrium quantity.
Equilibrium price is the price that achieves a market balance. Because quantity demanded and quantity supplied are equal at the equilibrium price, there is no shortage nor surplus in the market, which means that neither buyers nor sellers are inclined to change the price, which is the primary condition for equilibrium.

Moreover, because the equilibrium price also simultaneously equates the demand price and supply price, the market equilibrium generates an efficient allocation of resources (presuming competition and no market failures).

The Market

The market model displayed in the exhibit here can be used to identify the equilibrium price. This particular model represents the market for 8-track tapes, which are filled with the works of classic performers such as The Carpenters and Englebert Humperdink. The buyers and sellers happen to be folks attending the 88th Annual Trackmania 8-Track Tape Collectors Convention at the Shady Valley Exposition Center.

Equilibrium Price

Before getting to the equilibrium price consider the market itself.

  • First, the demand curve (D) is negatively sloped--higher prices correspond with smaller quantities. This negative slope indicates the law of demand.

  • Second, the supply curve (S) is positively sloped--higher prices correspond with large quantities. This positive slope indicates the law of supply.

Clearing the Market

Equilibrium price achieves a balance in the market, which is equality between quantity demanded and quantity supplied. It clears the market of any shortage or surplus. The only price that accomplishes this task is at the intersection of the demand curve and supply curve. This intersection point, and the price that achieves it, can be identified by clicking the [Equilibrium Price] button in the exhibit.

Doing so reveals that the equilibrium price is 50 cents. At this price, the demand curve and supply curve intersect. The quantity demanded is 400 tapes and the quantity supplied is 400 tapes. The quantity demanded is equal to the quantity supplied. The buyers can buy all that they want, so there is no shortage. The sellers can sell all that they want, so there is no surplus. Neither buyers nor sellers are motivated to change the price. The forces of demand and supply are in balance.

This is the ONLY price that achieves a balance between these two quantities. Best of all, because this is equilibrium, the equilibrium price of 50 cents does not change and the equilibrium quantity of 400 tapes does not change unless or until an external force intervenes.

<= EQUILIBRIUM, LONG-RUN AGGREGATE MARKETEQUILIBRIUM QUANTITY =>


Recommended Citation:

EQUILIBRIUM PRICE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: October 15, 2018].


Check Out These Related Terms...

     | equilibrium quantity | market equilibrium | equilibrium | market equilibrium, numerical analysis | market equilibrium, graphical analysis | market clearing | disequilibrium price | shortage | surplus |


Or For A Little Background...

     | price | demand price | supply price | demand curve | supply curve | market | demand | supply | quantity demanded | quantity supplied | law of demand | law of supply |


And For Further Study...

     | stable equilibrium | unstable equilibrium | market disequilibrium | self correction, market | comparative statics | market demand | market supply | exchange | competitive market | demand determinants | supply determinants | ceteris paribus | market-oriented economy | efficiency | marginal utility and demand |


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