Date: April 10th 2010

Understanding the Equilibrium Point

To do its work, the demand curve needs a supply curve. A demand curve is constructed with information from the firm’s customers or clients. It involves understanding the value equation for those who chose to purchase our products or services. We have talked about constructing a demand curve and a supply curve in previous posts. Once the demand curve is developed, how can it be used to analyze and make critical business decisions?

Just as price has an inverse relationship to quantity demanded by consumers (the higher the price, the less demand), price has a direct relationship to quantity supplied (the higher the price, the more produced). We can created the supply curve and the demand curve by placing two columns on a spreadsheet, one marked quantity and the other marked price. For each price step, determine the appropriate quantity. Use the spreadsheet to create a graph from the columns with the price on the y (vertical) axis and the quantity on the x (horizontal) axis. Since the axis values are the same, the demand curve and the supply curve can be placed on the same graph.

What the two curves suggest at intersection is equilibrium – a place where the demand at a certain price meets the supply at a certain price. This equilibrium suggests the point where the competitive forces of the market will push the firm’s activity. It may not be where the firm should be in the marketplace. More about that in later posts.

Please comment or post with your thoughts on the equilibrium point for your market.

© Rick Riebesell 2010. All rights reserved.

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Rick Riebesell
Business Transition Consulting LLC
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