Which statement best defines equilibrium price?

• A. The price at which quantity demanded equals quantity supplied
• B. The maximum price consumers are willing to pay
• C. The minimum price producers are willing to accept
• D. A price set by government regulation

Answer: (A)

Equilibrium price is the price at which the quantity demanded equals the quantity supplied. This is where the market clears: buyers want to buy the same amount that sellers want to sell. If the price goes above this level, a surplus occurs because producers are willing to supply more than buyers want to purchase, and prices tend to fall to restore balance. If the price falls below this level, a shortage occurs because buyers want more than producers are willing to supply, and prices tend to rise. The equilibrium price arises from the interaction of buyers’ willingness to pay and sellers’ willingness to accept; it’s not simply the maximum a consumer would pay, nor the minimum a producer would accept in isolation, and it isn’t set by government unless a price control is in place.