key term - Equilibrium Price

Definition

Equilibrium price is the price at which the quantity demanded of a good or service is exactly equal to the quantity supplied. It is the point where the demand and supply curves intersect, representing the market-clearing price that balances the interests of buyers and sellers.

5 Must Know Facts For Your Next Test

1. Equilibrium price is the price at which the market for a good or service clears, with no shortage or surplus.
2. The equilibrium price is determined by the intersection of the demand and supply curves, where the quantity demanded equals the quantity supplied.
3. Changes in demand or supply can lead to a shift in the equilibrium price and quantity, which is explained by the four-step process.
4. Protectionist policies, such as tariffs or quotas, can create a wedge between the equilibrium price and the price paid by consumers, leading to an indirect subsidy from consumers to producers.
5. Achieving and maintaining equilibrium price is crucial for the efficient allocation of resources and the well-being of both buyers and sellers in a market.

Review Questions

• Explain how the equilibrium price is determined in a market for goods and services.
  • The equilibrium price is determined by the intersection of the demand and supply curves. At the equilibrium price, the quantity demanded is exactly equal to the quantity supplied, resulting in a market-clearing price. This price represents the point where the interests of buyers and sellers are balanced, as neither party has an incentive to change the quantity traded or the price.
• Describe how shifts in demand or supply can lead to changes in the equilibrium price and quantity.
  • Changes in demand or supply can cause the equilibrium price and quantity to change. For example, if demand increases while supply remains constant, the equilibrium price and quantity will both increase. Conversely, if supply increases while demand remains constant, the equilibrium price will decrease and the equilibrium quantity will increase. This four-step process of analyzing the impact of shifts in demand and supply on the equilibrium is a crucial tool for understanding market dynamics.
• Analyze how protectionist policies, such as tariffs or quotas, can affect the equilibrium price and create an indirect subsidy from consumers to producers.
  • Protectionist policies, like tariffs or quotas, create a wedge between the equilibrium price and the price paid by consumers. These policies effectively raise the cost of imports, leading to a higher market price for the good or service. As a result, consumers pay more than the equilibrium price, while producers receive a higher price, creating an indirect subsidy from consumers to producers. This distortion in the market equilibrium can lead to inefficiencies and welfare losses, highlighting the importance of understanding the impact of government interventions on the equilibrium price.

Related terms

Demand Curve:

A graphical representation of the relationship between the price of a good or service and the quantity demanded, with price on the vertical axis and quantity on the horizontal axis.

Supply Curve:

A graphical representation of the relationship between the price of a good or service and the quantity supplied, with price on the vertical axis and quantity on the horizontal axis.

Market Equilibrium:

A state in which the quantity demanded and the quantity supplied of a good or service are equal, resulting in no tendency for prices or quantities to change.