Definition
The term equilibrium price refers to a state in which the quantity of goods supplied is equal to the demand for the same goods. Prices are typically stable for a product when they reach the equilibrium price.
Explanation
The equilibrium price is found at the point where demand for a product or service is exactly equal to supply. When supply and demand are plotted against price and quantity, the equilibrium price is found at the point where the supply curve intersects with the demand curve. Market forces will tend to bring supply and demand into balance; resulting in the following three generalizations:
When supply of a product or service is greater than demand, there is downward pressure on the price of the product or service.
When demand for a product or service is greater than supply, there is upward pressure on the price of the product or service.
When supply and demand for a product or service are in balance at the equilibrium point, the price of the product or service will be relatively stable.
Example
The following illustration demonstrates the equilibrium price.
Related Terms
The term carrying charge market is used to describe a condition where spot prices are lower than the long-term price of a futures contract. A carrying charge market is considered a normal market condition.
Moneyzine EditorJanuary 10th, 2024
The term inverted market is used to describe a condition where spot prices are higher than the long-term price of a futures contract. An inverted market is considered an abnormal market condition.Moneyzine EditorJanuary 22nd, 2024
The term fast market is used to describe a condition whereby the rapid trading of a security results in a delay in the transmission of data concerning sales and price quotes. While a fast market can affect common stocks, the term is more often associated with the trading of options.Moneyzine EditorSeptember 20th, 2023- The term seller's market is used to describe a condition whereby demand for an asset exceeds supply, thereby providing sellers with negotiating leverage. While a seller's market can apply to the sale of any asset, it's oftentimes associated with the real estate market.Moneyzine EditorSeptember 21st, 2023
The term buyer's market is used to describe a condition whereby the supply of an asset exceeds demand, thereby providing buyers with negotiating leverage. While a buyer's market can apply to the purchase of any asset, it's oftentimes associated with the real estate market.Moneyzine EditorJanuary 9th, 2024
