Interaction Between Market Demand and Supply: Determination of Equilibrium Price and Quantity

In general terms, equilibrium refers to the state of equality between two opposing forces, but from the perspective of market analysis, equilibrium refers to the state where the demand and supply of a good are equal.

The point at which the demand and supply of a good are equal is also the point at which the equilibrium price is determined. This means that at the equilibrium price, the quantity demanded and the quantity supplied of the good are equal.

State of Equilibrium (Determination of Equilibrium Price and Quantity)

Graphically, the equilibrium point is the point where the demand curve and the supply curve intersect each other.

In the above graph, the quantity demanded and supplied of the good is measured on the x-axis, and the price of the good is measured on the y-axis.

The market demand curve DD and the supply curve SS of the good intersect each other at point E. This point is called the equilibrium point or the point of market clearing. At this equilibrium state, the equilibrium price PE and the equilibrium quantity QE are determined. 

From this, it can be concluded that the equilibrium price is the price that equates the quantity demanded and the quantity supplied of the good.

The state of market equilibrium for a good can be presented as follows, based on the given demand and supply functions/equations:

Qd = Qs = E

Where, 

E = Equilibrium

Qd = Demand function or equation 

Qs = Supply function or equation

Example 1: If the demand equation for a certain good is Qd = 120 – 3P and the supply equation is Qs = -30 + 6P, then the equilibrium price and quantity can be found in the following way:

Solution: 

Here, Qd = 120 – 3P (Equation i) 

Qs = -30 + 6P (Equation ii)

We know that the condition for market equilibrium is: 

Qd = Qs (Equation iii)

From equations (i), (ii), and (iii): 

120 – 3P = -30 + 6P 

Or, -3P – 6P = -30 – 120 

Or, -9P = -150 

Or, 9P = 150 

P = 150 / 9 

P ≈ 16.67

Substituting the value of P in either the demand function or the supply function: 

Qd = 120 – 3P 

Qd = 120 – 3 x 16.67 

Qd = 120 – 50.01 

Qd ≈ 69.99

and,

Qs = -30 + 6P 

Qs = -30 + 6 x 16.67 

Qs = -30 + 100.02 

Qs ≈ 70.02

ஃ Equilibrium Price, P ≈ Rs. 16.67 and Equilibrium Quantity, Qd = Qs ≈ 70