An equilibrium price is a market price that represents a state of perfect balance between supply and demand. Known as a state of economic equilibrium, this price is achieved when the quantity of an item that is demanded by consumers is equal to the supply currently on hand. As a result, consumers are likely to consider the current price to be acceptable and move forward with the process of purchasing the goods on hand.
The phenomenon of an equilibrium price may be experienced in a number of different market settings. When found in the investment market, the equilibrium price is indicative of a situation in which the demand for a given stock, bond issue, or commodity is matched with the number of shares or interests that are currently available in that market. When this is the case, the resulting price is likely to be acceptable to investors, prompting both purchases and sales of those commodities.
This type of market equilibrium needed to realize an equilibrium price may also be experienced within a given industry market. For example, companies that manufacture canned goods will seek to find the ideal combination of supply and demand for their product lines, adjusting the production process so that the proper balance between what customers want and what they are willing to buy is identified. Doing so makes it possible to schedule production so that demand can be met, but the supply on hand is never so great that finished products spend long periods of time languishing in warehouses. By accurately reading market indicators, the goods can be priced at a level that allows the manufacturer to earn a profit but that will also be acceptable to consumers. As a result, the goods are produced at a rate that is sufficient to make sure consumers have what they want, but still sufficient to allow the business to earn enough money to remain in operation.
While an equilibrium price may be attained and held for a period of time, shifts in the marketplace can quickly undermine the balance between supply and demand. The appearance of new products in the marketplace may cause a shift in demand, which in turn would cause a disparity with the supply. At that point, producers would need to reevaluate the market situation and determine if a price change would be sufficient to restore that balance between supply and demand. If not, the business may have to curtail production to some degree in order to restore the balance, a move that would reduce operational expenses and possibly still allow enough profits to keep the company afloat.