Introduction to Economics

What Is Equilibrium Price In Economics;What Does It Do

What Is Equilibrium Price In Economics;What Does It Do

The equilibrium price is the price that equals the quantity offered and the quantity demanded of an economic good on the market. The equilibrium price is a meeting point between supply and demand. On the other hand, a market characterized by a scarcity of demand and a high supply, has a very low equilibrium price.

What Is Equilibrium Price In Economics;What Does It Do

Market forces push the price towards its equilibrium condition. For example, when demand is higher than supply (D ‘> S’), the market price of the asset tends to increase to the equilibrium level. Price increase reduces buyer demand and incentives sellers to increase supply The process of dynamic adjustment of demanded quantity and supply ends when the market reaches equilibrium price (p e ).

When the supply exceeds the demand (S ‘> D’), the market price of the asset tends to decrease to the equilibrium level. The dynamic adjustment process ends when the price reaches its equilibrium level (p e ) in which demand and supply are equal.

At the price p ‘the quantity demanded of the good (q D ) is lower than the quantity offered of the same (q S ). The sellers progressively reduce the price to avoid unsold stocks. The price reduction increases the quantity demanded from q D to Q * and reduces the quantity offered by q S to Q . In point q  the quantity demanded and offered is equal (market equilibrium) at the equilibrium price.

Equilibrium Price And Law of Demand

 The law of demand says that the quantity of demand is inversely proportional to the price. If the price rises, the quantity demanded decreases. Conversely, if the price falls then the quantity demanded rises. While the law of offer says that the quantity of supply is directly proportional to the price. If the price falls, the quantity supplied is reduced. Conversely, if prices rise, the quantity offered increases. Both laws apply to the condition of ceteris paribus. That is, in addition to price, other factors are fixed / unchanged. Suppose that if the price of the goods X rises, then the quantity demanded should decrease. However, if the actual increase in quantity demanded, then this means there are other factors that affect demand.
 For example, this happens because in the public circulation rumors that the price will be higher, so people  buy at first price increase. So, when the demand should decrease (as the price rises), what happens is actually rising. Factors other than this price will cause a shift in the demand and supply curve, which in turn will create a new equilibrium price.

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