DETERMINATION OF EQUILIBRIUM PRICE AND QUANTITY

CONTENT

1. Introduction
2. Equilibrium Price
3. Use of Demand and Supply Functions to Determine Equilibrium Price and Quantity
4. Effect of Changes in Demand and Supply on the Equilibrium Price
5. Price Legislation

Introduction

In a free market economy, prices are determined by the forces of demand and supply. This is also known as Price Mechanism or Price System.

Equilibrium Price

Definition of Equilibrium Price

This is the price at which demand equals supply. It is the price at which the quantity of a commodity that consumers are willing to buy equals the quantity of that commodity that suppliers are willing to sell. Therefore

At Equilibrium,

Demand = Supply

Equilibrium Price can be illustrated using the demand and supply schedules below:

The Equilibrium Point, Point E on the graph, is the point at which demand equals supply. At this point, Equilibrium price is ₦20, while quantity demanded and quantity supplied equals 40 unit.