Supply and Demand
The point at which supply and demand curves intersect is called market equilibrium. The word equilibrium means balance, a point of harmony, where supply and demand meet. It is when the quantity demanded equals the quantity supplied. Equilibrium prices are all around us. When you visit a store, every price you see for a product is an equilibrium price. It is important to remember that equilibrium prices are not fixed; they fluctuate with the forces of supply and demand. When there is too much demand(shortage) or too much supply (surplus), we have what economists refer to as disequilibrium. When a producer finds itself in disequilibrium, it has two choices: either adjust the price to meet demand, or adjust output to meet demand. it adjustments are not made in a timely manner, the firm will no longer be able to produce enough revenue to cover its costs. When examining both supply and demand, we must construct both a supply and a demand curve on the same graph.
Figure 2.5 shows a supply and demand graph.
You can see that when the supply and demand curves intersect, we have both an equilibrium price and quantity. Each time the supply or demand curve shifts, a new equilibrium is created. In figure 2-6, the graph on the left shows the impact an increase in demand has on price and quantity. The graph on the right illustrates the impact an increase in supply has on price and quantity.