1. When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
|
|
As you can see on the chart, equilibrium occurs at the intersection of the
demand and supply curve, which indicates no allocative inefficiency. At this
point, the price of the goods will be P* and the quantity will be Q*. These
figures are referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the
prices of goods and services are constantly changing in relation to
fluctuations in demand and supply.