Overview
Equilibrium price denotes the price level at which the supply for a good equals the demand for it. In this scenario, the amount of products in the market corresponds to the amount of the product buyers want to acquire. Understanding the equilibrium price is an important thing to do as it helps businesses to set fair prices and also ensure that the consumer gets the products they want, at a reasonable rate.
How Equilibrium Price Works?
Equilibrium price is formed when the supply and demand curve intersects in the market. When demand is low compared to supply, prices drop. Conversely, if demand is more than supply, prices can increase. Eventually, the market automatically adjusts, returning the price to the equilibrium.
Factors Affecting Equilibrium Price
- Cost Reduction: The cost reduction due to the use of the latest technologies makes companies able to produce more products to the point where prices start to fall.
- Consumer Demand: If the amount of a product that people want to buy increases, the price could go up until a time when the quantity of goods provided is equal to the demand.
- Market Trends: Price adjusts to shifts in the consumer behaviour and improvements in the technology which affect the demand and supply of the given commodities, hence adjusting the equilibrium price.
Conclusion
An equilibrium price refers to the crucial stage in the market cycle that guarantees a balance between the demand and the supply of the commodity. This is because it ensures that there are fair prices that do not lead to shortages or surpluses in the production of the commodities and is beneficial for both the sellers and the buyers.