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Equilibrium Price and Quantity

Equilibrium Price and Quantity

The equilibrium price is the price at which the quantity of a commodity demanded and supplied are equal. It is the price at which there is neither a surplus nor a shortage of the commodity in the market.

Under perfect competition, the equilibrium price is the market price for a commodity and it is determined by the interaction of the forces of demand and supply.

Example:

Market Demand and Supply Schedule for Indomie:

PriceQuantity DemandedQuantity Supplied
₦2520100
₦204080
₦156060
₦108040
₦510020

Use the above schedule to plot a graph showing equilibrium price and quantity.

Solution:

From the graph above, it can be seen that at ₦15, sixty cartons of Indomie were demanded and sixty cartons of Indomie were equally supplied. ₦15 is the equilibrium price while sixty cartons of Indomie is the equilibrium quantity and the point of interaction between the supply curve and demand curve (E) is called the equilibrium point.

If the price is at the level where supply is less than demand, then there will be excess demand which may result in shortages and increase the price. This is seen below the equilibrium point.

When the market price of a commodity is higher than the equilibrium price, then supply will definitely be higher than demand and the market will experience excess supply, resulting in a situation that represents surplus. This is seen above the equilibrium point.

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