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Highlighting one of the key features, is our expertise in the area of Economics. Economics is one subject which comes across as quite comprehensive but has a lot of intricacies associated with it. It is a social science that encompasses the different aspects of a business function viz. production, distribution and consumption of goods and services.
We understand that students often find it difficult to grasp the different concepts and solve problems. We offer you with the solution to all your queries pertaining to it. Covering a key feature of Economics i.e. Equilibrium Price Constant.
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Equilibrium Price Constant- Definition
The term “Equilibrium” used by Economists, basically refers to the balance between supply and demand activities in the marketplace. While determining the price of a commodity businesses often face an economic dilemma. As the customers want to purchase the goods at lower prices, on other hand business executives aim at a higher price.
This problem is resolved by the markets by settling at a price neither too high nor too low, i.e. by figuring out a compromise price.
The compromise price can be defined as the one at which the customer is willing to buy the goods and every business wants to sell goods at that price.
Therefore, Equilibrium Price Constant can be defined as:
The price at which the quantity demanded equals the quantity supplied is called an equilibrium price.
Internal and External Influences
An equilibrium state is vulnerable to both internal and external influences.
For instance, an advent of new product causes disruption in the marketplace. Let say launch of Xiaomi phones are an example of internal influence.
On other hand, during the Great Recession in 2008, which resulted in the collapse of real estate market in the United States is an example of external influence.
How to determine the equilibrium price constant mathematically
The equilibrium price can also be determined mathematically. One prerequisite before we go ahead into solving the equilibrium price constant is the quantity demanded must be equal to the quantity supplied.
Considering the equation
Q d = 300-50P (Demand Equation) Equation 1
In the equation above, Q d represents the quantity demanded for water bottles and P represents the price of a water bottle in INR. Now one thing which is noteworthy is a negative sign in front of P which implies, an increase in price will cause the demand to fall.
Q s = -100+150P (Supply Equation) Equation 2
In the equation above, Q s represents the quantity of water bottles supplied and P represents the price of a water bottle in INR. A positive sign indicates a direct relationship between that exists between price and quantity supplied.
On solving Equations 1 & 2, we figure out that P= INR 2
One needs to understand that equilibrium in a market occurs when the quantity supplied (Q s )in the market is equal to the quantity demanded (Q d ) in the market.
Therefore, one can determine the equilibrium by setting supply and demand equal and thereby solving for the value of P.
The equilibrium price for water bottles is the point where the demand and supply curve intersect corresponds to a price of INR2.00.
Thus, this is the price at which the quantity demanded of 200 bottles which has been derived from the demand curve is equal to the quantity supplied of 200 bottles determined from the supply curve.
[ Note : One can always double check the value obtained for P by both equation and graphical method.]
Well, this was one example where we made it quite easy for you to comprehend a concept pertaining to Supply and Demand.
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