What is meant by equilibrium price?

Equilibrium price refers to the point in a market where the quantity of a good or service supplied by producers equals the quantity demanded by consumers. At this price level, there is no surplus or shortage of the product, meaning that the market is in balance. This is significant because it reflects the optimal price point in a perfectly competitive market, where resources are allocated efficiently, and both buyers and sellers are satisfied with the transaction.

In contrast, when demand exceeds supply, it leads to a shortage, causing prices to rise until equilibrium is reached. If the price is set too high, it results in a surplus of goods as suppliers produce more than consumers are willing to buy, also prompting a price adjustment towards equilibrium. The highest price consumers are willing to pay and the lowest price producers will accept indicate different points in the market dynamics, but neither accurately describes the balance point where supply and demand are equal. Thus, the definition of equilibrium price is centered around the equality of supply and demand, making it a crucial concept in understanding market behavior.