Economic system in market economy

Equilibrium Price

Equilibrium Price

• We can now see how the market mechanism works under perfect competition.
• We do this by plotting both the supply curve and the demand curve on one graph. The point at which the two curves intersect is the equilibrium price. At this point, buyers’ demand for apples and sellers’ supply of apples is in equilibrium.

How is the market price determined?

• This lesson will explain what the market price is and also walk you through an example of determining the equilibrium price.
• Definition
• The equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market intersect.
• To determine the equilibrium price, you have to figure out at what price the demand and supply curves intersect.

The supply and demand curves intersect at P* and Q*, which are the equilibrium price and quantity.

• The supply and demand curves intersect at P* and Q*, which are the equilibrium price and quantity.
• It's one thing to be able to identify the equilibrium price on a graph, but you should also be comfortable figuring out the price algebraically. Here are the supply and demand curve formulas for this example: Qd = 50 - 5P and Qs = 5 + 10P.

The supply and demand curves intersect at the price of $0.60 and quantity of 2,000 pounds. Thus, $0.60 is the equilibrium price: At this price, the quantity of apples demanded by buyers equals the quantity of apples that farmers are willing to supply.

• The supply and demand curves intersect at the price of $0.60 and quantity of 2,000 pounds. Thus, $0.60 is the equilibrium price: At this price, the quantity of apples demanded by buyers equals the quantity of apples that farmers are willing to supply.
• If a farmer tries to charge more than $0.60 for a pound of apples, he won’t sell very many, and his profits will go down. If, on the other hand, a farmer tries to charge less than the equilibrium price of $0.60 a pound, he will sell more apples but his profit per pound will be less than at the equilibrium price.