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What Is an Equilibrium Price?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 October 2014
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An equilibrium price is a market price that represents a state of perfect balance between supply and demand. Known as a state of economic equilibrium, this price is achieved when the quantity of an item that is demanded by consumers is equal to the supply currently on hand. As a result, consumers are likely to consider the current price to be acceptable and move forward with the process of purchasing the goods on hand.

The phenomenon of an equilibrium price may be experienced in a number of different market settings. When found in the investment market, the equilibrium price is indicative of a situation in which the demand for a given stock, bond issue, or commodity is matched with the number of shares or interests that are currently available in that market. When this is the case, the resulting price is likely to be acceptable to investors, prompting both purchases and sales of those commodities.

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This type of market equilibrium needed to realize an equilibrium price may also be experienced within a given industry market. For example, companies that manufacture canned goods will seek to find the ideal combination of supply and demand for their product lines, adjusting the production process so that the proper balance between what customers want and what they are willing to buy is identified. Doing so makes it possible to schedule production so that demand can be met, but the supply on hand is never so great that finished products spend long periods of time languishing in warehouses. By accurately reading market indicators, the goods can be priced at a level that allows the manufacturer to earn a profit but that will also be acceptable to consumers. As a result, the goods are produced at a rate that is sufficient to make sure consumers have what they want, but still sufficient to allow the business to earn enough money to remain in operation.

While an equilibrium price may be attained and held for a period of time, shifts in the marketplace can quickly undermine the balance between supply and demand. The appearance of new products in the marketplace may cause a shift in demand, which in turn would cause a disparity with the supply. At that point, producers would need to reevaluate the market situation and determine if a price change would be sufficient to restore that balance between supply and demand. If not, the business may have to curtail production to some degree in order to restore the balance, a move that would reduce operational expenses and possibly still allow enough profits to keep the company afloat.

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candyquilt
Post 3

I wish everyone who wonders why produce is expensive would take a couple of minutes to read this article. This is a great explanation of how things would work if the economy was left alone and consumers could buy as much as they wanted and producers produced according to that.

Unfortunately, in a lot of our U.S. industries, especially the farm industry, the government sets the price of products. It does this because it doesn't want the farmer to go out of business by being paid too little. It may seem logical from that standpoint, but in reality, it creates a "fake demand" because when consumers don't buy everything that is produced (because the price is too high), the government will take care of it by buying what's leftover.

Farmers think that everything they produce is being sold, so they produce even more, which raises prices. Consumers buy even less and the government is forced to buy more and more of the goods to keep the farmers in business. It's a bad cycle!

This also means that the equilibrium price for many of the goods we have on the market today, is not really the equilibrium price. It's the fake equilibrium price set by the government.

turquoise
Post 2

Managing the equilibrium price is the best way to deal with rises in demand. Sometimes though, countries try to deal with it by rationing out goods, which actually makes the situation worse.

I think this happened in the early 80s in the U.S. too. It was also the case in Eastern Europe during Communist regimes. When basic necessities could not be produced or imported in sufficient amounts, it was rationed out accordingly. But people were not happy about waiting in line for hours to buy necessities like bread, sugar and gasoline.

If demand is too high and the supply can't keep up with it, you've got to raise the price higher to bring to equilibrium. Otherwise, it will be pretty chaotic to try and supply everyone with that good. If the price is allowed to shift to a point where it will balance demand and supply, the situation will resolve itself.

burcidi
Post 1

It sounds like it's quite a hassle to keep up with the equilibrium price. If the cost of producing a good goes up and the producer has to increase the price, or if the consumer just doesn't buy as much of it anymore, a new equilibrium price has to be found. Same when cost of production falls or customers buy more.

Is this why gas prices change so much?

I do think that the change in equilibrium price is ultimately always caused by the producer though. People don't start buying less or more gasoline just because they feel like it because it is something that we need and that most of us use on a daily basis. If the price of gas goes up or down, then we will change our buying habits. We might try and ride the metro when it is more expensive or opt to drive to work all the time if it is cheaper.

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