How is equilibrium price and quantity determined?

The equilibrium price and quantity in a market are determined by the intersection point of the supply and demand curves. This intersection represents the price at which the quantity of goods that consumers are willing to purchase equals the quantity that producers are willing to sell. At this point, there is no surplus or shortage in the market – meaning that supply and demand are balanced.

When demand increases, the demand curve shifts to the right, leading to a higher equilibrium price and quantity. Conversely, if demand decreases, the curve shifts to the left, resulting in a lower price and quantity. Similarly, changes in supply can shift the supply curve, influencing the equilibrium. This dynamic is fundamental in economic theory because it illustrates how markets self-regulate through price adjustments in response to changing supply and demand conditions.

In contrast, relying on averages of past market prices or government regulation does not directly reflect current market conditions and may lead to inefficiencies. Additionally, calculating seller and buyer preferences does not provide a precise method for determining equilibrium, as it does not account for the actual interaction between supply and demand in the marketplace. Therefore, the method of finding the intersection of the supply and demand curves is the most accurate and widely accepted approach for determining equilibrium price and quantity.