Glossary term
Equilibrium Price: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
The equilibrium price is the price at which the quantity buyers want to purchase equals the quantity sellers want to sell, so the market clears. At a higher price there is excess supply and at a lower price there is excess demand, which pushes the price back towards equilibrium.
In more detail
In equilibrium neither buyers nor sellers want to change what they do at the going price. If the price is above it, unsold stock pushes the price down; if below it, queues push it up. A shift in demand or supply moves the equilibrium to a new price and quantity.
Example
If demand is 500 − 4p and supply is 100 + 6p, setting them equal gives an equilibrium price of ₹40 and a quantity of 340. At ₹30 there is excess demand of 100.
Key points
- A shift in demand moves price and quantity in the same direction.
- A shift in supply moves them in opposite directions.
- With free entry and exit, it equals minimum average cost.
Common mistake
Thinking the equilibrium price is fair or desirable. It only clears the market.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 5: Market Equilibrium.