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What Is Equilibrium Price Level?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 September 2014
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    Conjecture Corporation
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An equilibrium price level is a type of pricing level indicating that a balance between supply and demand has been achieved. At that point, the price is considered ideal for attracting enough customers to consume the quantity of a given good or service that has been produced. As the name implies, the equal balancing of this supply and demand may be applied to specific products, or even to the overall production and demand associated with an industry. Identifying the equilibrium price level is helpful for a number of reasons, including the structuring of future pricing matrices and scheduling production of certain goods and services.

Companies benefit from identifying the equilibrium price level, as this figure can aid in determining how much to charge for each unit of goods produced by the company, while still having reasonable assurance that consumers will in fact buy those units. By identifying this more or less ideal price, businesses can determine if the price level is sufficient to cover all the expenses associated with producing those goods or services and still allow the business to make a profit. If so, the business can use this data to set retail pricing and also to plan for future production, based on what is known as the anticipated pattern of demand that will prevail both in the short-and the long-term.

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Governments can also make use of identifying the equilibrium price level associated with a company or select group of companies. This can be especially important if the industry in which those companies function is crucial to the economic well-being of that nation. By analyzing all relevant factors and arriving at the prevailing equilibrium price level, this data can be used in conjunction with other economic information to assess what a shift in this price level could mean to the economy, and plan accordingly.

In like manner, investors can utilize information about the equilibrium price level associated with a given investment opportunity, often by comparing the current level with past levels associated with specific events in the marketplace. This can provide data that helps to understand how the investment is likely to increase or decrease in value as certain economic events occur. That information, along with other relevant data, can help the investor decide whether to buy, sell, or hold shares issued by that company, based on what is expected to happen with shifts in the supply and demand for the company’s products.

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