[Commerce Class Notes] on Equilibrium Price Pdf for Exam

Equilibrium occurs when there is a state of no change. This tells us that equilibrium price is a price where both the seller and the buyer are in the position of no change.

Theoretically speaking, at this price,

Amount of goods demanded by the buyers = Amount of goods supplied by the sellers

Therefore, both the demand and supply work in synchronisation with the equilibrium price. In other words, the equilibrium price is where the state of the market supply and demand get equally balanced, which also then makes the prices for that certain product steady.

Cause and Results

Generally, when this happens, prices of these goods go down and this happens because of an oversupply of goods and services, this as result, increases the demand for these goods and services.

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Here in the diagram above, we can observe that the equilibrium price shows through the intersection of the supply and demand curve in the equilibrium price graph.

Equilibrium Price is also known as market-clearing price. 

Characteristics

The equilibrium of a market has certain major characteristics:

• The behaviour of the agents is consistent.

• Agents are not given any incentives in exchange for a change in behaviour.

• The equilibrium price formula calculates the equilibrium outcome that is governed by a dynamic process.

Example

We can take an example to understand the definition of Equilibrium Price better:

If we calculate this table with the help of the equilibrium price formula:

• In the given table, the quantity of demand is equal to the supply at the price of Rs. 60. This makes the Rs. 60 price as the equilibrium price. If instead of this price, we take any other price from the table, there can be a shortage or a surplus.

• The surplus would occur because if we take any value lower than 60, the quantity of supply would be more than the demanded quantity.

• The shortage would occur if we take a value of more than 60, the amount of the demand would be bigger than the available supply.

Equilibrium Price Definition

When the quantity of supply of goods matches the demand for goods, it is called the equilibrium price. The market is said to be in a state of equilibrium when the main experience is in the phase of consolidation or oblique momentum. Then, it can be concluded that demand and supply are comparatively equal. Equilibrium price examples are discussed below as well.

Equilibrium price definition can be understood this way, the neutral point of price where both the buyers and sellers are satisfied. An equilibrium price example: at equilibrium, there is neither scarcity nor state of abundance unless there is a change in the elements of demand and supply. With the increase or decrease in demand and supply, inverse behaviour occurs. 

Finding the Equilibrium Price

We can find the equilibrium price by using the equilibrium price formula. These are the steps:

• Calculate the supply function

• Calculate the demand function

• Set the equal amount of quantities for the demand and supply and solve these to get an equilibrium price

• Put this equilibrium price into a supply function

• Check the result by putting the equilibrium price into the demand function

Equilibrium Price Example

Let’s take an example for better understanding of equilibrium price definition:

Calculating with the Help of the Equilibrium Price Formula:

In this table, the quantity of demand is the same as the supply at the price of Rs. 60. Hence, the price of Rs. 60 is the equilibrium price. If we take any other value, there can be either shortage or surplus. Particularly, for any value lower than Rs 60, the quantity of supply is more than demanded, hence there is a surplus. Similarly, for any value more than Rs. 60, the amount of demand is more than the supply, creating a shortage. This type of question can also be solved by the equilibrium price graph.

This equilibrium price example shows that an equilibrium price can change the quantity of demand and supply.

More About Equilibrium Theory

A state of no change is called equilibrium. So clearly, at the equilibrium price, both buyer and seller are in the position of no change. Theoretically, at this price, the amount of goods demanded by buyers is equal to the amount supplied by the sellers. Hence, both demand and supply work in synchronization with the equilibrium price; this is an equilibrium price example. Equilibrium is the state of balancing of market supply and demand, and consequently, prices become steady. Generally, the reason for prices to go down is an oversupply of goods or services, resulting in higher demand for goods or services. Equilibrium price definition explains the state of equilibrium is the result of the balancing effect of demand and supply.

The equilibrium price is showing through the intersection of the demand and supply curve in an equilibrium price graph. It is also called the market-clearing price. The determination of the market price is the purpose of microeconomics, and hence microeconomic theory is also known as price theory. 

Equilibrium Price Graph

Here, given below is a graphical representation of demand and supply at an equilibrium price which validates the equilibrium price definition.

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How does a Supply Shock Affect Equilibrium Price and Quantity?

A supply shock affects equilibrium price and quantity positively and negatively. Supply shock indicates a sudden good change that means if it is a positive shock, the equilibrium price and quantity go up, and if it is a negative shock, it will be vice versa. 

How do Supply and Demand Affect Equilibrium Price?

With the upward shift, the supply decreases, the equilibrium price increases and demand stays stable. With the downward change in supply, the supply increases and the equilibrium price falls.

With the upward shift, demand increases, equilibrium price increases and supply stays stable. With the downward change in demand, demand decreases, equilibrium price decreases and supply remains steady.

It can be calculated using the equilibrium price formula.

Did you know?

• The equilibrium theory was introduced and developed by a French economist, Leon Walras, in the late 19th century.

• Walras used this theory to multi-market settings by bringing in another good into his model, which then helped him to calculate price ratios.

• The contribution of Walras’ to the theory helped economics to grow into a study that includes mathematical analysis at its centre.