What is equilibrium in the context of supply and demand?

Equilibrium in the context of supply and demand refers to the point at which the quantity of a good or service that consumers are willing to purchase equals the quantity that producers are willing to sell. This balance means that there is no inherent upward or downward pressure on the price; instead, the market is stable. When supply matches demand, the market operates efficiently, and resources are allocated optimally.

At equilibrium, the market clears, meaning there is neither a surplus nor a shortage of goods. If the price is set above this equilibrium point, a surplus will exist as producers supply more than consumers are willing to buy. Conversely, if the price is below equilibrium, a shortage will occur as consumer demand exceeds what producers can supply. Thus, the equilibrium price is crucial for understanding how supply and demand interact in a market economy.