What is the equilibrium price level?
An equilibrium price level is a type of price level that indicates that an equilibrium between supply and demand has been reached. At this point, the price is considered ideal to attract enough customers to consume the amount of a good or service that has been produced. As the name implies, the equal balance of supply and demand can apply to specific products, or even the general production and demand associated with an industry. Identifying the equilibrium price level is useful for several reasons, including structuring futures price matrices and scheduling the production of certain goods and services.
Firms benefit from identifying the equilibrium price level, as this value can help determine how much to charge for each unit of goods produced by the firm, while being reasonably certain that consumers will buy those units. By identifying this more or less ideal price, companies can determine whether the price level is sufficient to cover all expenses associated with producing these goods or services and still allow the company to make a profit. In this case, the company can use this data to set retail prices and also plan future production, based on what is known as the anticipated demand pattern that will prevail in the short and long term.
Governments can also make use of identifying the breakeven price level associated with a company or select group of companies. This can be especially important if the industry these companies operate in is crucial to that nation's economic well-being. By analyzing all the relevant factors and arriving at the prevailing equilibrium price level, this data can be used in conjunction with other economic information to assess what a change in that price level might mean for the economy and plan accordingly.
Likewise, investors can use information about the break-even price level associated with a given investment opportunity, usually by comparing the current level with previous levels associated with specific events in the market. This can provide data that helps you understand how the investment is likely to increase or decrease in value as certain economic events occur. This information, along with other relevant data, can help an investor decide whether to buy, sell or hold shares in that company, based on what is expected to happen with changes in the supply and demand of the company's products.