Equilibrium Price

At the equilibrium price, the market clears: there is no shortage and no surplus. On a graph, it is where the supply curve and the demand curve cross.

If the price is above equilibrium, sellers want to supply more than buyers want to purchase, creating a surplus. Unsold goods pile up, and sellers tend to cut prices. If the price is below equilibrium, buyers want more than sellers offer, creating a shortage. Buyers compete for limited goods, and prices tend to rise. These pressures push the price towards equilibrium.

For example, if concert tickets are priced at 50 and 10,000 people want tickets but only 5,000 are available, there is a shortage. Resale prices often rise until only about 5,000 people are still willing to pay.

The equilibrium price changes when supply or demand shifts. A bad harvest that reduces supply raises the equilibrium price of a crop. A fall in incomes that reduces demand for luxury goods lowers their equilibrium price.