Reading: Market Equilibrium
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 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.