Equilibrium

Definition

Equilibrium is the point at which supply equals demand for a product or service, resulting in a stable price. It occurs when market forces are balanced and there is no incentive for change in price or quantity.

5 Must Know Facts For Your Next Test

1. At equilibrium, the quantity supplied equals the quantity demanded.
2. Prices tend to stabilize at the equilibrium point unless external factors disrupt the market.
3. A surplus occurs if prices are above the equilibrium, leading to excess supply.
4. A shortage occurs if prices are below the equilibrium, leading to excess demand.
5. In financial markets, equilibrium can be influenced by interest rates and inflation.

Review Questions

• What happens to supply and demand at equilibrium?
• How do prices behave when they are above or below the equilibrium point?
• What roles do interest rates and inflation play in achieving equilibrium?

Related terms

Supply:

The total amount of a product or service available to consumers.

Demand:

The desire and ability of consumers to purchase a product or service.

Market Price:

The current price at which an asset or service can be bought or sold.