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Equilibrium is a state of balanced supply and demand.

On a graph, equilibrium occurs where the price and demand curves intersect. At this point, consumers are getting the amount of goods they want, suppliers are selling their goods and prices become stable.

To find the equilibrium price for hammers sold at a hardware store, chart the price on the vertical axis and the quantity produced on the horizontal axis. The demand curve slopes down because the hammers’ price decreases as more customers demand them, while the supply curve slopes up because producers will supply more hammers at a higher price to increase revenues. The equilibrium price is found where these curves intersect.

Reaching equilibrium can only be done in theory because the prices of goods and services change with fluctuations in demand and supply. For example, too much supply generally causes prices to decrease, which leads to greater demand.

Supply and demand are relatively equal and the market is generally in equilibrium when major indexes experience a period of consolidation or sideways momentum.

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