Market Equilibrium

Market equilibrium describes both the equilibrium price and the equilibrium quantity, the amount actually bought and sold at that price. On a supply and demand graph, it is the point where the two curves meet.

At equilibrium, every buyer willing to pay the market price can buy, and every seller willing to accept it can sell. There are no unsold goods and no unmet demand at that price.

Markets are constantly adjusting. When something changes, such as a new technology reducing production costs, supply increases. The old price now creates a surplus, so prices fall until a new equilibrium is reached, with a lower price and a higher quantity traded. When demand rises, for example because a product becomes fashionable, the opposite happens: prices rise and quantity increases.

In reality, markets may not always reach equilibrium quickly. Prices can be slow to adjust, information may be imperfect, and government rules such as price ceilings or floors can prevent the market from settling at equilibrium.