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.
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.
