Why does the price of strawberries rise after bad weather? Why do stores discount products that are not selling? In many competitive markets, the answer begins with the interaction between supply and demand.
The equilibrium price is the price at which the quantity buyers want equals the quantity sellers offer. A price below equilibrium can create a shortage, while a price above equilibrium can create a surplus, although real-world prices may adjust slowly.
Checked July 20, 2026. This article explains the basic supply-and-demand model used to study competitive markets. Actual prices may also be affected by contracts, regulations, limited competition, taxes, and other market conditions.
Demand and supply describe different decisions
Demand describes how much of a product buyers are willing and able to purchase at different prices during a certain period. Quantity demanded is the amount buyers want at one specific price.
When other conditions remain the same, buyers usually purchase less as the price rises and more as the price falls. Economists call this relationship the law of demand.
Supply describes how much producers are willing and able to sell at different prices. Quantity supplied is the amount sellers offer at one specific price.
When other conditions remain the same, sellers usually offer more as the price rises. A higher price may make additional production worthwhile. At a lower price, some production may no longer cover the seller’s costs.
How is the equilibrium price determined?
The equilibrium price is found where quantity demanded equals quantity supplied. The amount traded at that price is called the equilibrium quantity.
The following hypothetical example shows how buyers and sellers might respond to different prices for the same product.
| Price | Quantity Demanded | Quantity Supplied | Market Condition |
|---|---|---|---|
| $2 | 120 units | 60 units | Shortage of 60 units |
| $3 | 90 units | 90 units | Equilibrium |
| $4 | 60 units | 120 units | Surplus of 60 units |
In this example, $3 is the equilibrium price because buyers want 90 units and sellers offer 90 units. The equilibrium quantity is 90 units. These numbers are examples only and are not based on an actual product.
What happens when the price is below equilibrium?
At a price below equilibrium, buyers want more units than sellers are willing to offer. This gap is called a shortage, or excess demand.
Some customers may be unable to find the product. Sellers may receive more orders than they can fill, and available inventory may sell quickly. These conditions can put upward pressure on the price. As the price rises, quantity demanded generally falls while quantity supplied generally rises, moving the market closer to equilibrium.
The adjustment does not always occur through direct bidding. A shortage may instead produce waiting lists, purchase limits, long lines, or delayed delivery when sellers cannot or do not immediately raise prices.
What happens when the price is above equilibrium?
At a price above equilibrium, sellers offer more units than buyers want. This condition is called a surplus, or excess supply.
Unsold inventory gives sellers a reason to reduce prices, offer discounts, or reduce future production. A lower price generally increases quantity demanded and decreases quantity supplied, bringing the market closer to equilibrium.
Perishable products may adjust quickly because sellers want to avoid waste. Products covered by long-term contracts or fixed price schedules may adjust more slowly.
A price movement is different from a market shift
A change in the product’s own price causes movement along an existing demand or supply curve. A change in another condition can shift the entire curve and create a new equilibrium.
| Market Change | Likely Price Effect | Likely Quantity Effect |
|---|---|---|
| Demand increases | Higher | Higher |
| Demand decreases | Lower | Lower |
| Supply increases | Lower | Higher |
| Supply decreases | Higher | Lower |
Demand may shift because of changes in income, population, preferences, expectations, or the prices of related products. Supply may shift because of changes in production costs, technology, taxes, weather, regulations, or the number of sellers.
For example, a popular health report could increase demand for a certain food. If supply does not change, the new equilibrium price and quantity will generally be higher. A new production technology could increase supply, generally lowering the equilibrium price while increasing the quantity sold.
When supply and demand shift at the same time, the result may be less certain. The direction of price or quantity depends on which curve moves more.
Why real prices may not equal equilibrium prices
Equilibrium is a model that helps explain market pressure. It does not mean every price changes immediately or that the resulting price is fair, affordable, or socially desirable.
- Businesses may keep prices fixed because of contracts or posted-price policies.
- Production may take months or years to expand.
- A market with only a few sellers may not behave like a competitive market.
- Government price ceilings or price floors may limit price adjustments.
- Taxes, subsidies, transportation limits, and inventory shortages may affect the final price.
The Federal Reserve’s educational materials explain that competitive-market prices tend to move toward the point where quantity supplied and quantity demanded are equal. A shortage creates upward pressure, while a surplus creates downward pressure.
How to analyze a price change
Do not assume that a price increased only because “more people wanted it.” First ask whether demand changed, supply changed, or both changed. Then check whether the change is temporary, such as a weather disruption, or long-lasting, such as a new technology or permanent increase in production costs.
The market price is shaped by buyers and sellers responding to the same price signal. Equilibrium price is the point where their planned quantities match, but new information and changing market conditions can continually create a new equilibrium.