Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is meant by the equilibrium price in a market?

1. The price set by government regulation

2. The price determined exclusively by consumer demand

3. The price at which demand and supply are equal

4. The maximum price a consumer is willing to pay

The correct answer is: The price at which demand and supply are equal

The concept of equilibrium price in a market refers to the price point at which the quantity of goods that consumers are willing to purchase matches the quantity that producers are willing to sell. This balance occurs when demand and supply are equal, meaning there is neither a surplus nor a shortage of goods. At this price, the interests of both consumers and producers align, leading to a stable market condition. When the market is at equilibrium, every unit produced is sold, and there is no incentive for the price to change unless external factors (like changes in consumer preferences, production costs, or government regulations) come into play. This reflects the core principle of supply and demand balancing each other out in an efficient market. Understanding the equilibrium price is crucial for recognizing how markets function and how various factors can shift this equilibrium, affecting the overall market dynamics.