What Is an Equilibrium Price?

Equilibrium price refers to the price when the demand and supply of a commodity are equal. When the market supply-demand equilibrium is achieved, the equal demand price and supply price of the product is called the equilibrium price, and the transaction volume (demand and supply) of the product is called the equilibrium quantity. The state where the demand and supply are equal in the market is called the state of market clearing. ^[1]

Equilibrium price

Equilibrium prices are formed spontaneously during the competition between supply and demand in the market. The formation of equilibrium price is the process of price determination. Therefore, the price is determined by the competition between supply and demand in the market. It should be noted that the equilibrium price formation, that is, the price decision is completely spontaneous, if there is external intervention (such as

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When demand and supply change at the same time, how the equilibrium price and equilibrium output change depends on the direction and extent of the change in demand and supply.

(1) When the demand and supply increase at the same time, the equilibrium output increases, but the change in the equilibrium price cannot be determined; otherwise, the equilibrium output decreases, but the change in the equilibrium price cannot be determined.

(2) When the demand increases and the supply decreases, the equilibrium price rises and the change in the equilibrium output cannot be determined; when the demand decreases and the supply increases, the equilibrium price decreases and the equilibrium output cannot be determined.

Cobweb theory Generally speaking, if the price of a commodity is higher than the equilibrium point, it will cause the supply of the commodity to be greater than the demand for the commodity, which will cause the price to fall. Conversely, if the price of the commodity is lower than the equilibrium point, the The demand is greater than the supply, which causes the price of the commodity to rise. The phenomenon that commodity prices deviate from the equilibrium point and move closer to the equilibrium point is not absolute.

In real life, there are many commodities whose prices deviate from the equilibrium point but do not move closer to the equilibrium point. The direct reason for this is largely due to the elasticity of the supply and demand curves.

Cobweb theory is a model used to describe changes in supply, demand, and prices in a dynamic market. It explains the trajectory of prices that need to be adjusted away from the equilibrium point. The cobweb theory is mainly applied to commodities that are produced periodically. The most typical example is agricultural products, because producers adjust prices and output according to the selling price of previous commodities.