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Market equilibrium

The actual price you see in the world is a balancing act between supply and demand.

Key points

  • Supply and demand curves intersect at the equilibrium price. This is the price at which we would predict the market will operate.

Where demand and supply intersect

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.
Intersecting supply and demand curves
The graph shows the demand and supply for gasoline where the two curves intersect at the point of equilibrium.
The demand curve, D, and the supply curve, S, intersect at the equilibrium point E, with an equilibrium price of 1.4 dollars and an equilibrium quantity of 600. The equilibrium is the only price where quantity demanded is equal to quantity supplied. At a price above equilibrium, like 1.8 dollars, quantity supplied exceeds the quantity demanded, so there is excess supply. At a price below equilibrium, such as 1.2 dollars, quantity demanded exceeds quantity supplied, so there is excess demand.
We can also find the equilibrium price by looking at a table.
Price per gallonQuantity supplied in millions of gallonsQuantity demanded in millions of gallons
dollar sign, 1, point, 00500800
dollar sign, 1, point, 20550700
start color #df0030, dollar sign, 1, point, 40, end color #df0030start color #df0030, 600, end color #df0030start color #df0030, 600, end color #df0030
dollar sign, 1, point, 60640550
dollar sign, 1, point, 80680500
dollar sign, 2, point, 00700460
dollar sign, 2, point, 20720420
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.
Check out this video to see a discussion of how the interaction between supply and demand leads to an equilibrium price.

Want to join the conversation?

  • marcimus pink style avatar for user Zita Marco
    Do all companies use this term of Market Equilibrium? I think sometimes the Monopoly Company can higher their price but not make less the demand. Thank you :)
    (8 votes)
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  • female robot grace style avatar for user alannahr444
    So one of the key points says this the point at which the market will operate. So will the market crash if the price isn't at the equilibrium?
    (7 votes)
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  • leafers ultimate style avatar for user Addison Lewis
    Are equilibrium price points very common? How long does the equilibrium usually last?
    (7 votes)
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    • ohnoes default style avatar for user Tejas
      Every market has its own equilibrium. Equilibrium lasts until either supply or demand changes, at which point the price will adjust. How fast the adjustment occurs really depends on what market it is. Financial markets tend to react extremely fast. Consumer markets tend to also react quickly, but not as quickly as financial markets. Factor markets tend to react rather slowly. Markets in which the government is a party react extremely slowly.
      (10 votes)
  • aqualine ultimate style avatar for user chelseac
    Just say I went to the store to buy apples, how would I know if the price is at its equilibrium or not?
    (3 votes)
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    • male robot hal style avatar for user OLELA NICOLE
      1. Find out if the seller can be able to sell at a reduced price (through bargaining)
      2. Find out the price from more than one seller and compare.
      The seller will not be able to sell at a price lower price than equilibrium price (since he/she) will make losses. Inquiring the price from many potential sellers helps you determine the lowest possible price a seller would be willing to sell at, which is more or less the equilibrium price
      (8 votes)
  • spunky sam green style avatar for user Taha Anouar
    I think that's it's a benefit for consumers if there was a SURPLUS and for producers if there was a SHORTAGE is that can be Right ?
    (4 votes)
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    • aqualine ultimate style avatar for user Kevin Zhao
      Yes, you are correct. This is because when there is a surplus, producers have to sell their excess supply (surplus) at a lower price in order for consumers to actually be willing and able to demand for it. In a shortage, there is a low quantity available so the price is bid up by consumers who have demand for the good or service.
      (5 votes)
  • blobby green style avatar for user sherlynenjagi
    Given the products below and the events that affect them indicate what happens to the demand supply and the equilibrium price and the quantity in a competitive market
    a)Blue jeans. The wearing of blue jeans becomes less fashionable among the consumers
    b)Computers. Parts for making computers fall in price because of improvements in technology.
    c)Lettuce. Heavy rains that destroy a significant portion of the crop pour
    d)Chicken. Beef prices rise because severe winter weather reduces cattle herds
    (2 votes)
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    • piceratops ultimate style avatar for user Nusaybah
      I'll try to answer all parts of your question:
      a) Blue jeans become less fashionable. Consumers think, "Why should I spend money on buying blue jeans when they're not trendy anymore? I won't buy any that are at a high price". Suppliers see this, and lower the price of blue jeans. This scenario is similar to when Sal talks about a 'surplus' in the video in the article.
      b) So, making computers becomes cheaper. Suppliers find that they can sell them at a lower price. Consumers think "Yay! Cheap computers!" and start buying loads. Soon, all the computers have sold out, and suppliers see that they have to produce more and also raise the price. This is similar to the 'shortage' Sal talks about in the video
      c) Because of the heavy rains, most of the lettuce crop rots. Suppliers have less to sell, so they increase the prices. Consumers think "Hey. I'll go buy cabbage instead. Lettuce is too expensive." This scenario moves the demand and supply curves.
      d) People don't want to buy beef, so they buy chicken instead. Chicken is a substitute good. Check out the khan academy video about substitute and complement products: https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/demand-curve-tutorial/v/price-of-related-products-and-demand
      (4 votes)
  • blobby green style avatar for user Sarah Sant
    What is market clearing?
    (2 votes)
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  • blobby green style avatar for user s23100393
    Ps5 are a good example of this, because there is an increase in supply and they're still keeping the prices the same.
    (2 votes)
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  • blobby green style avatar for user bequebequi
    Could you please illustrate the various way through which a firm may compete in a competitive environment without necessarily being involved in business malpractice
    (1 vote)
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  • leaf green style avatar for user kdharamshi
    when speaking in terms of supply and demand, what does it mean when we speak about the economic concept of market mechanism? I know that it has to do with the tradeoff between supply and demand, however I am having trouble at understanding the full concept
    (1 vote)
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