How to calculate an equilibrium price
Easily explained equilibrium price in economics + example
What is meant by equilibrium price?
The equilibrium of the market in a market in which there is competition (for example a monopoly market is then excluded from this) is based on the so-called equilibrium price, at which both supply and demand are in harmony. It can be said that with regard to the equilibrium price, there is neither an excess of supply nor an excess of demand. The curve for demand and the curve for supply do not meet or do not overlap.
The equilibrium of the market can best be described as follows: there is both a price (equilibrium price) and a number (equilibrium quantity).
LISTED BELOW IS A CORRESPONDING EXAMPLE:
Which calculation has to be made to determine the equilibrium price:
A large number of different vendors offer size M chicken eggs at the weekly market.
THE OFFER IS SO:
If an egg costs 1.00 euros and 100 eggs are offered and the offer is always reduced by 10 eggs, if the costs are reduced by 0.10 euros each (this means at 0.90 euros there are only 90 eggs on offer, with 0 , 70 euros are then only 70 eggs on offer, etc.). This is shown graphically as a supply function with the amount of supply = 100 x price.
When it comes to inquiries, the opposite is the case: at a cost of 1.00 euros, customers do not take any eggs, but if the costs are then reduced by 0.10 euros, customer demand increases by 10 eggs (this means at 0.90 euros there is a demand of 10 eggs and at 0.70 euros there is a demand of 30 eggs, etc.). The demand function is as follows: amount of demand = 100-100 x cost.
In order to calculate the equilibrium of the price, one has to compare the supply function with the function of demand and solve for the costs (the price):
100 x price = 100 - 100 x price
200 x price = 100
Price = 0.50 euros
THE BALANCE OF THE QUANTITY:
If 50 eggs are offered for sale at a price of EUR 0.50 (supply quantity = 100 x 0.50 = 50) and there is a demand of 50 eggs (demand quantity = 100 - 100 x 0.50 = 50). The calculation is called the so-called equilibrium amount. This results in the following turnover: 50 eggs x EUR 0.50 = EUR 25.00.
If you imagine that an egg would cost 0.80 euros and there are 80 eggs for sale. However, if there is only a demand for 20 eggs, there would be an excess supply of 60 eggs, and the market turnover would be as follows: 20 eggs x 0.80 euros = 16.00 euros. There would thus be an imbalance in the market. The suppliers would have to carry out a price reduction so that the remaining eggs can also be sold - this price would then go in the direction of the so-called equilibrium price.
GRAPHIC REPRESENTATION OF THE MARKET BALANCE
The equilibrium on the market corresponds to the intersection between the supply and demand curves if the costs were € 0.50 and the number was 50 pieces.
REGULATION OF THE PRICE (MINIMUM AND MAXIMUM PRICE)
If the government interferes in the market by regulating the minimum and maximum price, there will be a change in the number of goods offered on the market.
THE FOLLOWING EXAMPLE IS REQUIRED BELOW:
Imagine that the government has set a maximum price for the eggs of 0.40 euros (0.10 euros less than the usual equilibrium price of 0.50 euros). If such a case were to occur, the following demand would arise: 100 x 0.40 = 100 - 40 = 60 eggs and the supply would look like this: 100 x 0.40 euros = 40 eggs, then the turnover on the market would be look like this: 40 x 0.40 euros = 16.00 euros.
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