The balance amount is an economic term representing the quantity of an item that demand at the point of economic equilibrium. It is the point where the supply and demand curves intersect. It is the amount that is exchanged when a market is in equilibrium.
The equilibrium quantity is simultaneously equal to the quantity demanded and the quantity supplied. Since the quantity demanded and the quantity supplied are equal, there is no shortage or surplus in the market, which means that neither buyers nor sellers are inclined to change the price or quantity, an essential condition for equilibrium.
Basic microeconomic theory provides a model for determining the optimal quantity and price of a product or service. This theory is based on the supply and demand model, which is the fundamental basis of market capitalism.
The theory assumes that producers and consumers behave predictably and consistently, and that no other factors influence their decisions.
What does it consist of?
In a supply and demand graph, there are two curves: one represents supply and the other represents demand. These curves are plotted against price (y-axis) and quantity (x-axis).
In this market graph the equilibrium quantity is at the intersection of the demand curve and the supply curve. The equilibrium quantity is one of the two equilibrium variables, the other is the equilibrium price.
If you look from left to right, the supply curve goes up; This is because there is a direct relationship between supply and price.
The producer has a greater incentive to supply an item if the price is higher. Therefore, as the price of a product increases, so does the quantity supplied.
The demand curve, which represents buyers, goes downward. This is because there is an inverse relationship between quantity demanded and price.
Consumers are more willing to buy products if they are cheap; therefore, as the price increases, the quantity demanded decreases.
Economic equilibrium point
Since the curves have opposite paths, they will eventually intersect on the supply and demand graph. This is the point of economic equilibrium, which also represents the equilibrium quantity and the equilibrium price of a product or service.
Since the intersection occurs at one point on both the supply and demand curves, producing / buying the equilibrium quantity of a good or service at the equilibrium price should be acceptable to both producers and consumers.
Hypothetically, this is the most efficient state that the market can achieve and the state to which it naturally hangs.
In theory, a supply and demand graph only represents the market for a product or service. In reality, there are always many other factors that influence decisions, such as logistical limitations, purchasing power, and technological changes or other industrial developments.
How to calculate it?
Before reaching the equilibrium quantity, the market itself can be considered. First, the demand curve (D) slopes downward: higher prices correspond to lower quantities. This negative slope shows the law of demand.
Second, the supply curve (O) has a positive slope: higher prices correspond to larger quantities. This positive slope shows the law of supply.
The equilibrium quantity results when the market is in equilibrium, which is the equality between the quantity demanded and the quantity supplied. The market is free of shortage or surplus.
Clearing the market
The only quantity that performs this task is at the intersection of the demand curve and the supply curve.
The equilibrium quantity is 400, at this quantity the demand curve and the supply curve intersect. The quantity demanded is 400 and the quantity supplied is 400: the quantity demanded equals the quantity supplied.
Buyers can buy as much as they want, as there is no shortage. Sellers can sell as much as they want, as there is no surplus. Neither buyers nor sellers are motivated to change the price; the forces of supply and demand are in equilibrium.
This is the only quantity that has an equilibrium between these two quantities. Because this is equilibrium, the equilibrium quantity of 400 does not change and the equilibrium price of 50 does not change, unless or until some external force intervenes.
To solve the equilibrium price and quantity, we must have a demand function and a supply function. Sometimes an inverse demand function will be given (for example, P = 5 – C); in this case we need to solve C as a function of P.
Once you have the supply and demand functions, you simply need to establish when the quantity demanded equals the quantity supplied, and solve.
Finding the equilibrium price
For example, if the monthly demand quantity function for a product is Cd = 10 000 – 80P, and the monthly supply quantity function for a product is Co = 20P, then we set Cd to be equal to Co and solve .
If Cd = Co then 10 000 – 80P = 20P
If you add 80P to both sides, and then divide by 100. You get:
10,000 – 80P + 80P = 20P + 80P
10,000 = 100P
100 = P
Finding the equilibrium quantity
To find the equilibrium quantity, the equilibrium price (100) can be connected to the demand or supply function. If you connect to the demand function you get Cd = 10 000 – 80 * 100 = 2000
If you connect with the supply function, you get Co = 20 * 100 = 2000. So, the steps are:
– Obtain the solved functions for Co (quantity supplied) and Cd (quantity demanded).
– Establish that Co is equal to Cd.
– Solve for P (equilibrium price).
– Reconnect P with the functions Co and Cd in order to obtain the equilibrium quantity.
The reason why it is established that Co is equal to Cd is because it is known that in equilibrium they must be equal. Since supply and demand will only intersect at one point, it is known that when Co = Cd it is in equilibrium.
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