The Fundamentals of Market Equilibrium

[Jose Almazan]

Market equilibrium occurs when the quantity of a good or service demanded by consumers equals the quantity supplied by producers, resulting in a stable price for that good or service. This equilibrium price is also known as the market-clearing price because it “clears” the market of any surpluses or shortages.

When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. Producers will lower prices to sell excess inventory, moving the market towards equilibrium, when the price is below the equilibrium price, the quantity demanded exceeds the quantity supplied. Consumers are willing to pay more to obtain the good, driving the price up towards equilibrium.

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