Basic Concepts of Equilibrium and Equilibrium Price

• Demand and supply explain how much of a good is wanted and how much is supplied at different prices.
• But these curves alone do not tell us the actual market price.
• Market price is decided where buyers and sellers interact, and demand equals supply.

• Equilibrium is a state of balance—where things remain stable if nothing changes.
• In economics, market equilibrium is when the amount buyers want to purchase equals the amount sellers want to sell.
• If demand ≠ supply, the market is not in equilibrium (called “disequilibrium”).

• The equilibrium price is when quantity demanded equals quantity supplied.
• At this price, there is no surplus or shortage; no incentive for buyers or sellers to change behaviour.
• The corresponding quantity sold at this price is called equilibrium quantity.

1. Consumers buy goods that satisfy their wants (utility).
2. The highest price a consumer pays depends on marginal utility (extra satisfaction from one more unit).
3. Marginal utility sets the maximum price.

1. Producers/sellers provide goods to earn profit.
2. The lowest price a seller accepts is set by marginal cost (cost to make one more unit).
3. Marginal cost sets the minimum price.

1. Buyers want to pay the least, sellers the most.
2. The market price—equilibrium price—is determined between buyers’ max and sellers’ min limits, using demand and supply forces.

1. George Stigler was a well-known American economist and a major leader of the Chicago School of Economics.​
2. He won the Nobel Prize in Economics in 1982 for his research on how markets work and the effects of government regulations.​
3. Stigler worked with other famous economists, including Milton Friedman.​

Imagine a new video game released in the market. If the price is too high and nobody buys, shops lower the price. If the price is too low and it sells out quickly, shops raise the price next time. Eventually, the price settles where demand = supply. That’s market equilibrium.

• Equilibrium is when there is no tendency for price or quantity to change.
• Equilibrium price makes buyers and sellers agree on how much to buy and sell.
• Both marginal utility and marginal cost matter in deciding the final price.