How do demand and supply curves determine equilibrium price?

The equilibrium price is determined where the demand and supply curves intersect, indicating a balance between buyers and sellers.

In a market, the demand curve represents the quantity of a good or service that consumers are willing and able to buy at different prices. It slopes downwards from left to right, indicating that as the price decreases, the quantity demanded increases, and vice versa. This is known as the law of demand. On the other hand, the supply curve represents the quantity of a good or service that producers are willing and able to sell at different prices. It slopes upwards from left to right, indicating that as the price increases, the quantity supplied also increases, and vice versa. This is known as the law of supply.

The point where the demand and supply curves intersect is called the equilibrium point. At this point, the quantity demanded by consumers equals the quantity supplied by producers, and the market is in a state of balance or 'equilibrium'. The price corresponding to this point is the equilibrium price, and the quantity is the equilibrium quantity.

The equilibrium price is significant because it is the price at which the market clears, meaning there is neither a surplus nor a shortage of the good or service. If the price is above the equilibrium price, there will be a surplus, as the quantity supplied will exceed the quantity demanded. Producers will then lower their prices to clear their excess stock, which will increase the quantity demanded and decrease the quantity supplied, moving the market towards equilibrium. Conversely, if the price is below the equilibrium price, there will be a shortage, as the quantity demanded will exceed the quantity supplied. Producers will then raise their prices to capitalise on the high demand, which will decrease the quantity demanded and increase the quantity supplied, again moving the market towards equilibrium.

In conclusion, the equilibrium price is a crucial concept in economics, as it represents the price at which the market is in balance, with no tendency for change. It is determined by the interaction of demand and supply in the market, and changes in response to shifts in these curves.