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Equilibrium is another key concept in Economics.  It can be defined as the point at which supply is exactly equal to demand.  When this happens, we would say the market has been “cleared”.  

Price Demand Supply $1 300 100 $2 250 150 $3 200 200 $4 150 250 $5 100 300

In the situation above, we can see that the demand and supply lines have been put on to the same set of axes.  As a result, the lines cross.  The point at which they cross is the equilibrium point.

It is important to note that this concept applies to both the price and the quantity.  For example, in the situation above the equilibrium price is $3, and the equilibrium quantity is 200 units.  Therefore it is important that you mention both the price and quantity when you are discussing equilibrium in a particular market.

If all markets looked like this, then making decisions about how to allocate our scarce resources would be relatively easy.  Problems start to occur when we look at any market in even slightly more detail.  When we do that, the first thing that we will see is that the lines that we have graphed for supply and demand are not stable; they will move over time depending on other economic conditions.  As these lines move, the equilibrium point will also move.

The ability to make predictions based on these changes is a fundamental skill in Economics.

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