The state of market equilibrium is achieved when the interests of buyers and sellers coincide, demand becomes equal to supply. The price at which this coincidence occurs is called the equilibrium price and is calculated using the best pricing method.
Instructions
Step 1
Equilibrium in the market is an ideal situation in which the interests of buyers are satisfied and the costs of the seller-producers for the manufacture of goods are covered. The equilibrium price is the value of a product in such a state of affairs when a balance is reached between the number of units of production offered and the amount of goods that consumers want to purchase. In other words, it is the equality of supply and demand.
Step 2
At an equilibrium price, there is no situation of shortage or surplus of goods on the market. Such a price does not rise or fall and can be set automatically with an equal ratio of certain indicators, or be set artificially by increasing or decreasing production volumes. Different approaches are used to ensure the balance. However, it should be remembered that the equilibrium price is conditionally stable; it is prevented from changing by forces that support the market in a competitive situation.
Step 3
Two approaches to establishing the equilibrium price are widely used. This is the equilibrium theory according to Marshall and Walras, the English and French economists of the late 19th century, who had a great influence on the development of economic science.
Step 4
The Marshall method consists of comparing supply and demand prices, analyzing their changes, and sellers' responses. According to Marshall, a deviation from equilibrium can occur in two cases: when the demand price exceeds the supply price and vice versa.
Step 5
When the demand price becomes higher than the supply price, the volume of production and its sale in the market is below the equilibrium level. Thus, sellers are encouraged to increase the quantity of the product or service produced. If the supply price exceeds the demand price, then the supply has gone beyond the equilibrium level. In this case, sellers must reduce their production. When the situation reaches equilibrium, the demand price equals the supply price.
Step 6
According to Walras, the equilibrium price is formed on the basis of an analysis of the ratio of supply and demand. There can be two situations: the volume of supply exceeds the volume of demand, competition between sellers begins, the market price falls; the volume of demand exceeds the volume of supply, there is competition between buyers, the market price rises.
