Bargaining on prices is an activity that is very common between the seller and the buyer in order to get a price that is appropriate and does not harm each party. Well, the price agreement that results from this bargaining activity is an example of an equilibrium price.
So, what is the equilibrium price? How does the equilibrium price occur? Don’t worry, because we will briefly explain it to you through the article on balance pricing below.
Contents
1 Definition of Equilibrium Price
2 Processes and Factors For Establishing Equilibrium Prices
3 Roles and Functions of Equilibrium Prices in the Economy
4 Then, How to Calculate the Equilibrium Price
4.1 1. Calculating the Equilibrium Price with the Table
4.2 2. Calculating the Equilibrium Price with a Curve
4.3 3. Mathematical Approach
Understanding Equilibrium Price
In the world of economics, the equilibrium price is the price formed from the meeting point between the supply curve and the demand curve.
Simply put, as we have mentioned above, namely the price of the agreement that has been made between the seller and the buyer. Because this equilibrium price occurs due to the interaction of supply and demand in the market, this equilibrium price is often known as the market price.
Generally, this equilibrium price has been formed and will last for a long time, and will be used as a benchmark between buyers and sellers.
The equilibrium price or in a foreign language known as the Equilibrium Price will be greatly influenced by the law of supply and demand.
The law of demand is the demand for a product or service that will increase when the price in the market is decreasing. Meanwhile, the law of supply will increase if the price of goods or services in the market is increasing.
So, the law of equilibrium price is that if the quantity demanded is greater than the quantity supplied, the price will increase. Meanwhile, if the actual supply is greater than the quantity demanded, the price will decrease.
Process and Factors For Establishing Equilibrium Price
As previously explained, market prices will occur due to the interaction factor between sellers who carry out trading activities and buyers who carry out demand activities.
The thing that needs to be underlined in this case is that the interaction process must be carried out fairly. This means that the price bargaining interaction process must be carried out without any intervention from a third party that could cause harm to one of the parties.
If we look at the process of forming this market price, we can see various factors that can affect the equilibrium price, namely:
1. Increase the demand for goods or services, but the number of goods or services is limited.
2. Low or high production costs.
3. Future view of consumers or producers in the market.
4. Producers have an understanding of consumer tastes.
5. Increase the supply of goods or services, but the purchasing power of consumers remains or even decreases.
6. An increase in the supply of goods or services, but the purchasing power of consumers remains or decreases.
The Role and Function of Equilibrium Prices in the Economy
In addition to aiming to obtain a price agreement that is preferred between the seller and the buyer, the function of the broad equilibrium price formation is as follows.
1. Showing the changing needs that occur in society
2. Provide stimulus to business people to be able to innovate on changing demand in the market
3. Assist sellers in determining offers
4. Assist producers in determining the type of goods that will be made later
5. Determine the distribution of production results among consumers
6. Determine the right technology to be used in the production process.
Then, how to calculate the equilibrium price
Actually, calculating the equilibrium price is not that difficult. In the world of economics, there are three ways you can calculate it, namely by using tables, curves, and mathematical balances.
1. Calculating the Equilibrium Price with the Table
Calculating the market price using a table can be done easily by creating a table that contains the price with the P-code, the number of goods demanded with the Qd code, and the number of goods offered with the Qs code.
In the table, the price must be filled with a list of prices given, in the Qd column you can fill in the number of units requested based on that price, while for the Qs column you can fill in the number of units that can be offered at that price.
2. Calculating the Equilibrium Price with the Curve
The method of calculating the equilibrium price using the actual curve is almost the same as the table. All you have to do is make P and Q the curves. While the intersection of D or demand and S on supply will form a straight line which will produce the market price.
3. Mathematical Approach
This mathematical approach can only be used if the data obtained is a function of supply and demand. To calculate the market price with a mathematical approach, the formula that can be used is as follows:
Qd = Qs or Pd = Ps
Information:
Qd is the quantity demanded, Qs is the quantity supplied, Pd is the quantity demanded, and Ps is the quantity supplied.
For example, it is known that the demand function Qd = 80 – P and the supply function Qs = 8P – 100. Now to determine the price and the balance amount, first use the formula above.
Qd = Qs
80 – P = 8P – 100
-P – 8 P = 100 – 80
-9P = – 180
P = (-180/-9) = 20
So, based on the above formula, the equilibrium price (P) is 20. Meanwhile, to find the balance (Q) amount, you only need to enter the price value into one of the known functions.
Q = 80 – P
Q = 80 – 20
Q = 60
So, the balance value (Q) is 60. We can test this value for validation because if we enter the Qs formula, the value will be the same.
Q = 8P- 100
Q = 8(20) – 100
Q = 160 – 100
Q = 60
So, even using the Qd or Qs formula the results will be the same and the equilibrium price is 60.