Equilibrium Quantity

Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Equilibrium Quantity Definition

Equilibrium quantity refers to the quantity demanded and supplied when there is equal supply and demand in the market. It appears at the equilibrium point when there is neither shortage nor surplus of the specific product happens.

The law of supply and demandLaw Of Supply And DemandThe law of supply and demand refers to one of the core concepts in economics explaining the relationship between demand, supply, and price of products and services. It integrates the concepts of the law of demand and the law of supply.read more primarily explains the quantity circulating in the market. For example, the law of demand points out that consumers will desire less quantity when the price rises. On the other hand, according to the law of supplyLaw Of SupplyThe law of supply in economics suggests that with other factors remaining constant, if the price of a commodity increases, its market supply also goes up and vice-versa.read more, sellers will offer more quantity when the price rises. These two rules combine to influence the price and quantity.

Key Takeaways

  • Equilibrium quantity in economics refers to the quantity distributed following the demand creating no shortage or surplus condition in the market; that is, the supply and demand are balanced and equal.
  • The equilibrium point is the point where the supply and demand curves intersect. The point reveals the optimum price and quantity.
  • It is calculated by solving equations for quantity demanded and quantity supplied (a – bP = x + yP). Solving it gives the value of “P,” and applying the value of “P” in the QD or Qs equation gives the result.

Equilibrium Quantity Explained

The equilibrium quantity concept in economics can be easily explained using the supply and demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more. The equilibrium point is formed at the supply and demand curve intersection. In its graphical representation, the x and y coordinates of the equilibrium point represent the equilibrium quantity and price, respectively.

When supply increases and crosses the demand, the price starts falling, and when demand is calculated as more than the supply, the price rises. Hence if the demand remains constant, supply and price will manifest an inverse relationship. Furthermore, the supply increases given demand is constant the equilibrium point changes resulting in a higher equilibrium quantity and lower equilibrium price. At the same time, if the supply decreases but the demand is the same, the new equilibrium points to a higher price and lower quantity. Similarly, if the demand increases and supply remains the same, the higher demand leads to a higher equilibrium price and quantity. Whereas, if the demand decreases and the supply is constant, it will result in a lower equilibrium point.

The concept points to market demand, consumer behavior, and market trend, thereby helping companies restructure their product pricing and decide the inventory level. By analyzing and controlling the price and production, entities can balance supply and demand to equilibrium. For example, entities like exporters can utilize the concept based on various equilibrium scenarios to evaluate possibilities for further export expansion.

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Formula

The equilibrium quantity formula is derived from solving the linear equations formed for the supply and demand curve.

Equilibrium Quantity

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Consider a basic linear supply function:

y = mx + b

Demand and supply equation based on the above linear equation:

Demand equation: QD = a – bP

  • QD: Units demanded
  • P: Price of each unit

Supply equation: Qs = x + yP

  • Qs: Units supplied
  • P: Price of each unit

At equilibrium, supply and demand intersect, pointing to the equilibrium price and quantity. At equilibrium price:

Quantity demanded = Quantity supplied

Qs = QD

Substituting the formula for Qs & QD

x + yP = a – bP

Solving the above gives the value of “P,” and applying the value of “P” in the QD or Qs equation gives the equilibrium quantity.

Calculation Example

Let’s consider a simple example for a better understanding of the concept. The ABC retail outlet collected only 20,000 amounts of product A every year to sell. In recent years the shop started facing stockout issues with product A specifically at the year-end, and its restocking is hard since it is an imported product.

Based on assumptions, the ABC outlet increased the inventory purchase of product “A” to 30,000 and increased the retail price to solve this issue. Unfortunately, the books of accounts revealed an inventory surplus with the increased inventory purchase. After a detailed study of demand and supply, ABC store purchased 27,000 of product A in the new financial year to sell at a competitive price. At the year-end, the ABC store sold the product A purchases. So, it indicates that the equilibrium quantity for product A is 27,000.

Frequently Asked Questions (FAQs)

What is the definition of equilibrium quantity in economics?

It refers to the quantity distributed without generating a shortage or surplus situation in the market. The quantity supplied can be less than, more than, or equal to the quantity demanded. When it is equal, the supply and demand curve intersect and create the equilibrium stage. Hence the supply and demand are balanced.

How to calculate equilibrium quantity?

It can be calculated by solving the demand and supply function (Qa – bP = x + yP). Solving the equation when the supply equals the demand gives an equilibrium price. Input the equilibrium price in the demand or supply function to determine the quantity.

What is the equilibrium quantity example?

A retail shop selling umbrellas experiences increased sales and prices during the rainy season and decreased sales and prices during other seasons. If not planned accordingly during the rainy season, the demand will surpass the supply, and supply will surpass the demand during other seasons. Hence, the shop determines the appropriate quantity and price so that the supply meets the demand.

This has been a Guide to Equilibrium Quantity and its Definition in Economics. We explain its formula, calculation, example, and relationship with price. You can learn more about accounting from the following articles –

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