Market Equilibrium

Market equilibrium is the point where the quantity buyers want to buy exactly equals the quantity sellers want to sell. It is where the demand curve and the supply curve cross. At that point there is no pressure for the price to rise or fall, so economists call the equilibrium price the market-clearing price: it clears the market, leaving no leftover goods and no unmet buyers.

The two values that define the equilibrium are:

• Equilibrium price (Pe): the single price at which quantity demanded equals quantity supplied.
• Equilibrium quantity (Qe): the amount actually bought and sold at that price.

On a graph, read off the point where the curves cross: drop a line down to the quantity axis for Qe and across to the price axis for Pe.

Algebraically, set quantity demanded equal to quantity supplied and solve for the price. If demand is Qd = 100 - 2P and supply is Qs = 20 + 2P, then setting Qd = Qs gives 100 - 2P = 20 + 2P, so 80 = 4P and Pe = 20. Substituting back, Qe = 100 - 2(20) = 60.

Equilibrium matters because any other price does not last:

• Above Pe there is a surplus (excess supply): sellers cannot sell everything, so they cut the price back toward Pe.
• Below Pe there is a shortage (excess demand): buyers compete for scarce goods, so the price is bid up toward Pe.

These forces are why a free market tends to settle at equilibrium. When the curves themselves shift, the equilibrium moves too — see changes in price and quantity.

• Confusing equilibrium quantity with the quantity on one curve. Qe is where both curves agree, not just what buyers want or sellers offer.
• Forgetting to solve for both values. Find Pe first, then substitute back to get Qe.
• Thinking a surplus lowers demand. A surplus changes the price and the quantity traded, not the demand curve itself.

Related lessons

• Microeconomics