Economics: The Point of Equilibrium
Now that we have talked about the Law of Supply and Demand, we can talk about Equilibrium. First, let us review the Laws of Demand and Supply, and then the single Law of Supply and Demand. The Law of Demand says two things. First, the cheaper something is, the more people will want to buy it. Second, the more people want to buy something, the more expensive it will become.
On the other hand, the Law of Supply says two things. First, the more expensive something is, the more people will want to sell it. Second, the more people are selling something, the cheaper it will become. Combining those, the Law of Supply and Demand says that the buyers and sellers need to come to an agreement on the price of something.
This price that they agree to is called the point of equilibrium. Equilibrium literally means “a state of rest or balance.” At the moment that the sellers and buyers agree on a price, there is a balance between the wants of the buyers (to buy things cheap), and the sellers (to sell things expensively). Therefore, there is equilibrium.
Why is equilibrium so important to economics? Economics is the efficient allocation of scarce, or limited, resources. When a student goes to a store and tries to decide what to buy, he is already practicing economics. He has to allocate his resources (money) so that he can get the most that he wants out of it.
Say he wants an ice cream bar, but he finds it too expensive. He (the buyer) and the store (the seller) are not in equilibrium. The student then finds a chocolate bar that he can afford, but which he does not want. The buyer and seller are not in equilibrium. Finally, the student finds a cookie pack that he can afford and that he wants. The buyer and seller are now in equilibrium.
We have been talking only about price, which is more on the side of the buyer. How about on the side of the seller? It is more about quantity, or amount. The quantity or amount of whatever is being sold affects the price of the thing. Equilibrium happens when the number of buyers and the number of things sold are equal.
If there are too many of the thing being sold (goods), and not enough buyers, the price will go down. Why? The sellers need to sell everything they have. The lower they put the price, the more people will want to buy it (remember our Law of Demand?). But if there are too many buyers and not enough goods, the price will go up.
The buyers need to reach the equilibrium amount. So if there are only ten bottles of water, and twenty buyers want it for 50 dollars a bottle, there is no equilibrium. If the price goes up to 60 dollars but 15 buyers still want the water, there is no equilibrium. If the price goes to 75 dollars and only 10 buyers want the water, there is now equilibrium.
To review, equilibrium is when there is a balance between the sellers’ price and the buyers’ price. Equilibrium is also when there is a balance between the goods for sale and the buyers who want the goods.