Equilibrium of Supply and Demand

Now that we have introduced the concepts of supply and demand separately -- with illustrative examples of the demand for, and supply of, beer -- it is time to move on from analysis to synthesis, and put the two concepts together. In economic theory, the interaction of supply and demand is understood as equilibrium.

We may think of demand as a force tending to increase the price of a good, and of supply as a force tending to reduce the price. When the two forces balance one another, the price would niether rise nor fall, but would be stable. This analogy leads us to think of the stable or natural price in a particular market as the "equilibrium" price.

This sort of "equilibrium" exists when the price is just high enough so that the quantity supplied just equals the quantity demanded. If we superimpose the demand curve and the supply curve in the same diagram, we can easily visualize this "equilibrium" price. It is the price at which the two curves cross. The corresponding quantity is the quantity that would be traded in a market equilibrium.

Let's see what that looks like in the market for beer.

Diagram