In economics, the equilibrium price is the price that is not subject to changing influence neither from the supply nor from the demand side. This means that the supply corresponds to the demand; in other words, the consumer and the supplier have coincided in determining the price of the product.
Explanation:
In order to calculate the equilibrium price mathematically, it is necessary to calculate the demand and supply functions and then set the supplied quantity equal to the demanded quantity and solve the equilibrium price. In the graph, the supply and demand functions will be counter-directional, because the customer is willing to buy more for a lower price, and the seller is willing to sell more for a higher price. The intersection point of these functions is the point that determines the equilibrium price.
In the most general form, the function of supply and demand looks as follows: “Q = mP + b,” where “m” demonstrates the slope of the function, “b” presents its y-intersect, and “P” is the required value of the price. For instance, the demand function for collection brands will be: “Qd = 600 – 100P”. In this case, the sign before the “mP” is negative, because as the price increases, the quantity of demanded products will decrease. The supply function will be: “Qs = – 200 + 300P”, and it reflects the positive correlation between the price indicator and the quantity of the product offered by the seller.
In order to calculate the equilibrium price of the collection brands, it is necessary to set the supplied quantity equal to the demanded quantity: “Qd = Qs.” Thus, the final equation for the equilibrium price calculation is as follows: “600 – 100P = 300P – 200”. The solution of this equation suggests that the equilibrium price is 2. This means that at a price of 2, the supply and demand for collection brands will correspond to each other.