DEFINITION of 'Equilibrium Quantity'
Economic quantity is the quantity of an item that will be demanded at the point of economic equilibrium. This point is determined by observing the intersection of supply and demand curves.
Basic micro-economic theory provides a path for finding the optimal quantity and price of a good or service. This theory is based on the supply and demand model, which is the fundamental basis of market capitalism. This theory rests on some caveats:
- That producers and consumers behave predictably and consistently
- That neither of these agents have other factors influencing their decisions.
BREAKING DOWN 'Equilibrium Quantity'
In a supply and demand chart, two curves representing supply and demand, respectively, are plotted against price (the y-axis) and quantity (the x-axis). If looking from left to right, the supply curve slopes upwards. This is because there is a direct relationship between price and supply. The producer has a greater incentive to supply an item if the price is higher. Therefore, as price increases, so too does the quantity supplied.
The demand curve, representing buyers, slopes downwards. This is because there is an inverse relationship between price and quantity demanded. Consumers are more willing to purchase goods if they are inexpensive; therefore, as price increases, the quantity demanded decreases.
Since the curves have opposite trajectories, they will eventually intersect on the supply and demand chart. This is the point of economic equilibrium, which also represents the equilibrium quantity and equilibrium price of a good or service. Since the intersection occurs at a point on both the supply and demand curves, producing/buying the equilibrium quantity of a good or service at the equilibrium price should be agreeable for both producers and consumers. Hypothetically, this is the most efficient state the market can reach, and the state to which it naturally gravitates.
Supply and demand theory underpins most economic analysis, but economists caution against taking it too literally. A supply and demand chart only represents, in a vacuum, the market for one good or service. In reality, there are always many other factors influencing decisions, like logistical limitations, purchasing power, and technological changes or other developments in the industry.
It also doesn't account for potential externalities, which can result in market failure. For example, during the Irish potato famine of the mid-19th century, Irish potatoes were still being exported to England. The market for potatoes was in equilibrium - Irish producers and English consumers were satisfied with the price and the quantity of potatoes in the market - but the Irish, who were not a factor in reaching the optimum price and quantity of items, were starving. Alternately, corrective social welfare measures to correct such a situation, or government subsidies to prop up a specific industry, can also impact the equilibrium price and quantity of a good or service.