How to Calculate an Equilibrium Equation in Economics

Updated on December 31, 2018

Economists use the term equilibrium to describe the balance betwixt supply and demand in the marketplace. Nether ideal market conditions, price tends to settle within a stable range when output satisfies customer need for that good or service. Equilibrium is vulnerable to both internal and external influences. The appearance of a new product that disrupts the marketplace, such as the iPhone, is ane case of an internal influence. The plummet of the existent estate market place equally part of the Great Recession is an example of an external influence.

Often, economists must churn through massive amounts of data to solve equilibrium equations. This step-by-step guide will walk yous through the nuts of solving such problems.

Using Algebra

The equilibrium price and quantity in a market place are located at the intersection of the marketplace supply curve and the market demand bend.

While it is helpful to encounter this graphically, it's also important to exist able to solve mathematically for the equilibrium price P* and the equilibrium quantity Q* when given specific supply and need curves.

Relating Supply and Demand

The supply bend slopes upward (since the coefficient on P in the supply curve is greater than zip) and the demand curve slopes downwards (since the coefficient on P in the demand curve is greater than zero).

Likewise, we know that​ in a basic market place the price that the consumer pays for a proficient is the same every bit the price that the producer gets to go along for the expert. Therefore, the P in the supply bend has to exist the same as the P in the demand bend.

The equilibrium in a market occurs where the quantity supplied in that market is equal to the quantity demanded in that market. Therefore, we can notice the equilibrium by setting supply and demand equal and and so solving for P.

Solving for P* and Q*

Once the supply and need curves are substituted into the equilibrium condition, it's relatively straightforward to solve for P. This P is referred to as the market price P*, since it is the price where quantity supplied is equal to quantity demanded.

To find the market quantity Q*, simply plug the equilibrium price back into either the supply or demand equation. Note that it doesn't matter which one y'all use since the whole point is that they take to give you the same quantity.

Comparing to the Graphical Solution

Since the P* and Q* represent the condition where quantity supplied and quantity demanded are the aforementioned at a given toll, it is, in fact, the example that P* and Q* graphically correspond the intersection of the supply and demand curves.

It is oft helpful to compare the equilibrium that you found algebraically to the graphical solution to double check that no adding errors were made.

Spotter Now: How to Calculate Gdp Deflator