What Is Economics
Macro and Microeconomics
Production Possibility Frontier (PPF)
Specialization and Comparative Advantage
Demand and Supply
The Law of Demand
The Law of Supply
Time and Supply
Supply and Demand Relationship
F. Shifts vs. Movement
The availability of substitutes
Income available to spend on the good
Income Elasticity of Demand
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.
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