Equilibrium Price Assignment Help

Your Simple Guide To Mastering The Basics Of Equilibrium Price

In economics, a market reaches an equilibrium price when the supply of goods matches the demand. It is that price point in the supply and demand graph at which the consumers and producers reach a mutual agreement.

Equilibrium Price Definition

The equilibrium price is the point where the quantity of supplied goods matches the market demand. Therefore, both the supply and demand neutralise each other to give rise to a stable price.

Equilibrium is vital in creating a balanced and efficient market where the supplied and demanded quantity balance each other out. Any change in the demand or supply curve immediately changes this equilibrium price.

What Is Equilibrium Price?

The equilibrium price is that steady price that you achieve when there is a balance between the market supply and demand. In this state, both the supplier and the customers are satisfied.

The equilibrium state in the market remains until there is a sudden shift in the supply or demand quantity. If the customers suddenly do not want a product, then the supply exceeds the demand. In this case, the supplier has to lower the product price below their desired point to avoid an inventory overflow. In the other case, if the purchase of a product increases suddenly, then the demand will surpass the supply. In such cases, the supplier can increase the price to generate more profits.

In both of these cases, there is no equilibrium between supply and demand. The economist Adam Smith, however, believed that any free market would tend towards a balance. For example, if the sellers increase the product's price in demand by a lot, customers might not want to buy it any longer. Thus, the seller would have no choice but to lower it again.

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How To Find Equilibrium Price?

As you already know, the equilibrium price is the point where the price and demand of a product intersect. Companies make it a priority to find out this price to balance customer satisfaction and profit.

There are three ways in which you can find out the equilibrium price of a product in the market:

• By looking at a demand and supply graph
• By using a table that shows the quantity demanded and supplied at different prices
• By using the algebra method where you already know the equation for supply and demand curves

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How To Calculate Equilibrium Price?

Calculating the equilibrium price becomes simple when you know the supply function, demand function, and equilibrium price formula.

The linear supply function is-

Qs = x + yP, where Qs= supplied quantity, x= quantity, P= price

The demand function is-

Qd = x + yP, where Qd= demanded quantity, x= quantity, P= price

Finally, the equilibrium price formula is-

Qs = Qd

If you want to calculate the equilibrium price, all you have to do is follow four simple steps:

1. Calculate the supply function

Using the supply formula Qs = x + yP, you can easily find out the supply line algebraically and on a graph. Taking the example of the supply of a jacket in the market, Qs represents the supplied quantity of the jacket, whereas x and P represent the price of the jacket in dollars.

Now, if the for $400 a jacket, the demand is 5000.

So, Qs = 5000 + 400P

2. Calculate the demand function

Similarly, using the demand formula Qd = x + yP, you can find out the demand line algebraically and on a graph. If Qd represents the demand in quantity, assuming that the seller can supply 10000 jackets at the price of $300 per jacket,

Qd = 10000 + 300P

3. Set the two quantities equal in terms of price

You need to supply function equal to the demand function if you want to find the equilibrium price.

Therefore, Qs = Qd,

Or, 5000 + 400P = 10000 + 300P

4. Solve the equation to find the equilibrium price

Solving the function using standard mathematical formulas will help you figure out the value of P.

Therefore,

5000 + 400P = 10000 + 300P

Or, 100P = 5000

Or, P = 5

This example gives you a positive equilibrium price which translated to the fact that there is a positive slope. It means that the seller is supplying more jackets than is needed at the equilibrium price. Therefore, the next step would be to reduce the number of jackets in the market. Read about money market.

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What Is The Difference Between Market Price And Equilibrium Price?

When the demand of a product becomes equal to the supply, the state achieved is the equilibrium price state. Here, both the customers and the suppliers are satisfied with the prices.

However, the market price is the economic price at which the seller offers the products or goods in the marketplace.

Several factors affect the market price, such as utility and demand, similar products, market competition, etc. However, the equilibrium price is only affected by the supply and demand.

In most cases, these two terms are used as the same. However, they present two completely different principal aspects of the economy.

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