What is Equilibrium Quantity?
Equilibrium quantity refers to the quantity of a good supplied in the marketplace when the quantity supplied by sellers exactly matches the quantity demanded by buyers. It is a concept within the subject area of market balance or market equilibrium and is closely related to the concept of equilibrium price.
The concepts of supply and demand and equilibrium quantity and equilibrium price are illustrated in the following graph:
Within a broader framework, the idea of equilibrium quantity is a part of general macroeconomic theories of supply and demand, marketplace operations, and market efficiency.
The concept of equilibrium quantity is a theoretical construct more so than a practical marketplace reality. It is unlikely that there is ever a point in time or a marketplace price point at which supply and demand precisely match up and are exactly equal. Nonetheless, the concept is useful for understanding how the forces of supply and demand interact, and how markets function to create efficient pricing of goods.
- Equilibrium quantity refers to the point of balance in the marketplace where the supply of a given good perfectly matches the consumer demand for the good.
- Equilibrium quantity and equilibrium price are basic concepts within the overall macroeconomic theories of supply and demand, free markets, and capitalism.
- The concept of equilibrium quantity is more of a theoretical construct rather than a practical reality, as supply and demand conditions in the marketplace are rarely in perfect balance.
Understanding Supply and Demand
To understand the concept of equilibrium quantity, one needs to understand the basics of how supply and demand interact and affect the price of available goods. The economic theory of capitalism holds that when markets can operate freely, the forces of supply and demand will naturally interact in such a way to produce market efficiency and optimal pricing.
What does it mean in practical terms? It means that in free markets, increased demand over available supply will drive prices higher, while increased supply over current demand levels will drive prices lower. The tendency will be to move toward equilibrium quantity, where supplies provided by manufacturers and retailers approximately match the quantity of a good that is demanded by consumers.
The point at which supply and demand levels meet, or intersect, is the point of both equilibrium quantity and equilibrium price. The equilibrium price is considered the optimal price, as it is the price level at which neither consumers nor suppliers enjoy an advantage or suffer a disadvantage relative to the other.
Again, free-market operations tend to move toward that level of equilibrium quantity and equilibrium price. This is the state of balance where all of a good that is supplied is purchased and all of a good that is demanded is available for purchase.
In addition, the equilibrium quantity price will be a price that is both affordable for the majority of consumers and a price at which suppliers can earn a reasonable profit. When imbalances of supply and demand for a given good occur, the market price will shift either up or down to return the market to the point of balance.
The quantity supplied and the marketplace price – which represents demand – can readily be seen as moving in opposite directions. The interaction of the forces of supply and demand basically translates to greater supply driving prices lower or greater demand driving prices higher. The point at which marketplace demand and marketplace supply intersect is the point of balance where equilibrium quantity and equilibrium price are found.
Example of Equilibrium Quantity
Manufacturer A produces an annual quantity of 50,000 cell phones, which retail at a price of $35. However, it discovers that, at that price level, consumers buy up all of its available phones, and, before the year ends, the supply of phones is exhausted.
In response to the level of consumer demand, the company increases its annual production level to 75,000 phones and raises the retail price to $50. The company then finds itself with a surplus of leftover, unsold phones at the end of the year.
Readjusting once again to marketplace conditions, the next year the company produces 65,000 phones, with a retail price of $45. At the end of the year, the company’s sold almost its total supply of phones. It indicates that the equilibrium quantity of phones is 65,000, at a retail price of $45 (which would be the equilibrium price).
CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below: