The concept of equilibrium quantity is directly related to the broader concept of economic equilibrium. In general, this refers to the state where there is an absence of external influences that would otherwise throw certain economic forces off balance. It’s exactly what it sounds like: an equilibrium. In this guide, we’ll learn about what some of these outside influences and economic forces are, and how equilibrium quantity operates in relation to them. For more, check out this course on basic principles of microeconomics.
What is Equilibrium Quantity?
In microeconomics, the term equilibrium is used in much the same way that it is in any other context. Equilibrium is simply a state where conflicting or overlapping forces strike a point of symmetry, or balance. Even though equilibrium sounds like the bigger, more complicated word, what we really need to examine here to understand the meaning of equilibrium quantity is that last part: quantity.
Well, by its dictionary definition, quantity refers to a number or amount of a certain thing. Most of us know this, but what does quantity mean in terms of economics? To understand that, we need to take a step back and closely examine one of the most basic concepts in microeconomics…
Supply and Demand
One of the most fundamental concepts in economics, and likely one of the first things you’ll learn when studying it, is supply and demand. Supply and demand is an economic model that exists as the very foundation of a market. The model itself asserts certain things about price determination, but before we get into that, let’s explain what its two parts mean.
Demand, which we’ll start with first, is a market’s desire or need for a certain good. The market can be made up of anyone who is a consumer, with currency to exchange for the particular good. For example: in modern American society, there is a market for smartphones. The people in the market for a new smartphone are consumers in a competitive marketplace for these electronic devices, where numerous companies such as Apple and Samsung exist to meet that demand.
A seller such as an individual or their company meets that demand by supplying the competitive market with the good that they need or want. The supply is determined by the demand for the good. If the market does not want or need something, then the seller will not increase their output for this item. If they do, this will result in a surplus of that good, which will consequently result in a loss of profit for that company, since it costs them money to produce that good in the first place.
This particular conflict, and related scenarios, is captured in the four laws of supply and demand, which dictate the dynamic between a market’s wavering supply and demand. If demand goes up and supply doesn’t increase to match, then this results in a shortage of a good that the market wants. The price of the good will shoot up because it’s now rare. We’ll learn more about this later, or you can study up now with this course on basic microeconomics concepts.
Supply and demand can be demonstrated with a simple chart.
Here, the vertical axis P represents price, and the horizontal axis Q represents quantity. The blue line represents supply, and the green line represents demand. You can plot a point anywhere on here in accordance with a few variables you have regarding a competitive market, and be able to understand how other elements come into play. These all directly coincide with the basic laws of supply and demand as well.
For example, if the price of an item is extremely low when the quantity is very high, then we know demand the supply heavily outweighs the demand. This point would be plotted at the far bottom right of this chart, and would indicate a surplus of a good where the seller is forced to lower the price to meet the low demand and get rid of an excess in supply. If the price of an item is extremely high, but the quantity is very low, then we know that demand is high, but supply is low. This particular point would be plotted at the far upper left of the chart, and would indicate a shortage of a good, where the seller is forced to increase the price to meet the high demand for an item that they are unable to output any more of without losing profit. (Of course, this is just one scenario that would cause a shortage.) If you’re confused, check out this course on how the economy works for some extra insight.
Economic equilibrium exists in that middle spot where supply and demand overlap. It is the perfect and most efficient state a market can be in, when the supply for an item matches its demand, and the demand for an item matches its supply. Sellers are happy, buyers are happy, and the market can thrive in this economically healthy and stable state. This broader concept is economic equilibrium. All quantity equilibrium refers to is the quantity of an item in a marketplace that would allow for a price equilibrium to exist alongside it.
Note that this is only an economic theory, since in reality marketplaces are constantly shifting. This is so because the cost of outputting items can change, which is one factor that would cause a seller to raise the price of a good. If they are spending more to produce a good than they are making from selling it, then they’re effectively losing money.
Economic disequilibrium is the name for some of the scenarios we listed above, where supply heavily outweighs demand or demand heavily outweighs supply, or any number of imbalanced scenarios that would cause a negative and potentially nonprofitable shift in the marketplace. If you want to learn more about this concept and other important economic theories, here’s an introductory course on both micro and macroeconomics. If you want to apply your knowledge, you can learn how to make strategic economic decisions with the help of this course.