An equilibrium price is a price that balances supply and demand.

The theory of an Equilibrium Price can be applied to many different markets, including the labor market, the grocery store, and even online retail.

Why does this concept matter and why do businesses seek an Equilibrium Price? (Or do they?)

You know that if you set your prices too high, your customers won’t buy from you – at least not enough of them at any rate.

And if you set your prices too low, you will leave money on the table and lose the chance to maximize your revenue and profit.

So do businesses really seek an equilibrium price? Or is an equilibrium price forced upon them?

We’ll answer this question in this article. And the answer may surprise you!

Why do businesses seek an equilibrium price
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What is Equilibrium Price?

Equilibrium Price is the price point at which demand for a product or service perfectly equals the available supply.

Let’s understand this concept by taking a simple example.

Let’s say you have a store, and you sell aromatic candles. You’ve purchased 500 candles from your supplier at a cost price of $5 per candle.

You decide to price each candle in your store at $30.

After a month, you realize that at $30 a candle, no one’s buying!

So, you drop the price to $25 a candle. Now, you sell 50 candles but still have plenty left in stock.

So, you drop the price further to $20 a candle. Now, you sell another 100 candles at this price but then sales stagnate again.

You cut prices once more, this time going down to $15 a candle. Now demand shoots up and you are able to sell all remaining stock.

What this tells you is that at about $15 per candle, the supply meets the demand. That makes $15 the Equilibrium Price for that type of candle.

Why do businesses seek an Equilibrium Price?

Actually, businesses do not seek Equilibrium Price but instead are forced in its direction.

Businesses have a clear goal – Maximize Revenue and Profits. And the way to maximize revenue and profit is to charge the customer as much as you can get away with.

In a monopolistic market, you could get away with charging anything you want, certainly way higher than the Equilibrium Price.

But in a free market, you will have competitors who will charge less than you for a comparable product and either force you out of business or force you to lower your price towards the Equilibrium Price.

This is what we saw in the example in the previous section. In that example, you charged $30 per candle and probably lost customers to competitors. This forced you to drop prices repeatedly till you reached the Equilibrium Price of $15 a candle.

But you could use the same logic to turn the tables on your competitor. You could find out your competitor’s pricing and then price your products lower, to push your competitor towards the Equilibrium Price.

Is Equilibrium Price the best price?

No, it isn’t. The Equilibrium Price is neither the best price for a business nor is it the best price for the consumer. Instead, it is a compromise price.

Given a choice, a business would rather charge more than the Equilibrium Price so as to maximize revenue and profit.

And given a choice, a consumer would rather pay less than the Equilibrium Price in order to get the best return on their investment. In fact, consumers would be just fine paying nothing at all if they could get away with it.

In a free market, the Equilibrium Price is the compromise price that is acceptable to the business and the consumer.

Are markets always in Equilibrium?

No, in fact, free markets are almost never in Equilibrium.

Market Equilibrium is achieved when demand and supply are equal and balanced. But that never happens.

Demand changes constantly. Consumers may wish to buy a product today and tomorrow they may buy something else instead. Or a new product on the market suddenly becomes popular and demand takes off while another product tanks, and no one wants it anymore.

Similarly, Supply too, is constantly changing. New suppliers enter the market with substitute products. And old suppliers sometimes exit a market either by discontinuing a line of products or by going out of business. Or, a transportation strike or the shortage of raw materials could suddenly restrict the supply of a product changing the Equilibrium Price.

As Demand and Supply change continuously, the Equilibrium Price also changes continuously.

So, in a free market, Market Equilibrium remains a theoretical concept and the market never reaches equilibrium.


  • Market Equilibrium is a condition of a market where supply equals demand.
  • Equilibrium Price is the price at Market Equilibrium. It is the price that balances supply and demand.
  • Business do not seek Equilibrium Price. Usually., Equilibrium Price is forced upon them.
  • Free Markets are never in Equilibrium. Constantly changing demand and supply ensure that true Market Equilibrium is never achieved.