Calculating Equilibrium Price: Definition, Equation & Example
How is the market price determined? This lesson will explain what the market price is and also walk you through an example of determining the equilibrium price.
Definition
The equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market intersect.
To determine the equilibrium price, you have to figure out at what price the demand and supply curves intersect.
Equation and Example
This is easiest to see visually on this graph:
Market Equilibrium
Market Equilibrium
The supply and demand curves intersect at P* and Q*, which are the equilibrium price and quantity.
It’s one thing to be able to identify the equilibrium price on a graph, but you should also be comfortable figuring out the price algebraically. Here are the supply and demand curve formulas for this example: Qd = 50 – 5P and Qs = 5 + 10P.
The supply curve is denoted as Qs, and the demand curve is denoted as Qd. They are both written as a function of price. If you happen to get formulas that are price as a function of quantity, then you would want to rearrange the formula to match this format.
To find the equilibrium price, you want to find the price at which the two equations intersect. In other words, find the price when the quantities Qs and Qd are the same. This is done by simply setting the two equations equal to one another, then solving the equation for P.
Let’s go through this together.
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