The key difference between market price and equilibrium price is that market price is the economic price for which a good or service is offered in the marketplace whereas equilibrium price is the price where demand and supply for a good or service are equal. Market price and equilibrium price are two of the principal aspects of economics. The two terms are treated as equal at times. However, it is essential to use the correct term as intended in economic studies. Thus, it is important to understand the difference between market price and equilibrium clearly.
CONTENTS
1. Overview and Key Difference
2. What is Market Price
3. What is Equilibrium Price
4. Side by Side Comparison – Market Price vs Equilibrium Price
5. Summary
What is Market Price?
Market price is the economic price for which a good or service is offered in the marketplace. Market price is significantly affected by the demand, availability of substitutes and the competitive landscape.
Demand
Demand is the most significant driver of market price. Demand is defined as the willingness and ability to purchase a product or service. When more customers are demanding more quantities, suppliers see this as an opportunity to make more profits. Thus, he will increase prices.
E.g. Apple has experienced an ever increasing demand for their products; they are sold at above the average prices compared to competitor prices such as Samsung.
Availability of Substitutes
When there are many substitutes available in the market, the suppliers are forced to lower the prices due to less bargaining power. Substitutes may be direct or indirect.
E.g. Xbox and PlayStation are home video game console platforms introduced by Microsoft and Sony, respectively.
Competitive Landscape
Competitive landscape relative to the competitors also affects the determination of market price. Suppliers in monopoly (a market where there is a single supplier) or oligopoly (a market where there are limited suppliers) are better positioned to control market prices.
E.g. OPEC, the oligopoly of crude oil exporting countries collectively set the market prices.
What is Equilibrium Price?
Market equilibrium is a market state where the supply in the market becomes equal to the demand in the market. Thus, the equilibrium price is the price where demand and supply for a good or service are equal.
E.g. Customers are willing to purchase a carton of milk within the price range of $12-$16. A supplier incurs a cost of $10 to produce a carton of milk and sells for $14. Since the price is within the expected range, the customers are willing the purchase the product, making the equilibrium price $14.
A shift in demand or supply changes the equilibrium price; thus, it is affected by factors affecting demand and supply.
Factors Affecting Demand
- Inflation
- Income level
- Consumer taste and preference
- Competitor products
Factors Affecting Supply
- Cost of production
- Availability of resources
- Technological advancements
Figure 01: Shift in demand or supply result in a change in the equilibrium price
If the market price is above the equilibrium, there is an excess supply in the market, and the supply exceeds the demand. This situation is referred to as a ‘surplus’ or ‘producer surplus.’ Due to the high inventory holding cost, suppliers will reduce the price and offer discounts or other offers to stimulate more demand. This process will cause the demand to increase and the supply to decrease until the market price equals the equilibrium price.
If the market price is below the equilibrium, then there is an excess of demand and the supply is limited. Such situation is referred to as a shortage ’or ‘consumer surplus.’ In this case, customers are willing to pay a higher price in order to obtain the good or service in short supply. Motivated by the increase in demand, suppliers will start to supply more. Eventually, the upward pressure on price and supply will stabilize at market equilibrium.
Figure 02: Consumer surplus and producer surplus at market equilibrium
What is the difference between Market Price and Equilibrium Price?
Market Price vs Equilibrium Price |
|
| Market price is the economic price for which a good or service is offered in the marketplace. | Equilibrium price is the price where demand and supply for a good or service is equal. |
| Factors | |
| Market price may be affected by a number of factors depending on each industry. | Equilibrium price is a phenomenon that is always affected by demand and supply. |
| Nature | |
| Equilibrium price is an ideal price that a product/service should be bought and sold, but the actual price resulting in the transaction may be different due to the bargaining power of buyers & sellers. | Market price is the actual price prevailing in the market; therefore, it is less complicated to understand. |
Summary – Market Price vs Equilibrium Price
The difference between market price and equilibrium price depends on the economic price for which a good or service is offered in the marketplace (market price) and the price at which demand and supply interact, i.e. the equilibrium price. To understand the theoretical concept better, the equilibrium price is often depicted in graphical form. It should be noted that even though the market is at equilibrium, this may not reflect the ideal price due to market imperfections such as demand or supply overstate or understate. On the contrary, the market price is relatively less complicated to understand since it is not a theoretical price.
Reference:
1. “Market Equilibrium in Economics: Definition & Examples.” Study.com. Study.com, n.d. Web. 25 Apr. 2017.
2. “MARKET EQUILIBRIUM.” Fullcoll. N.p., n.d. Web. 25 Apr. 2017.
3. Larmore, Carrieanne, and Jenn Walker. “What Factors Affect Market Price?” WiseGEEK. Conjecture Corporation, 21 Apr. 2017. Web. 25 Apr. 2017
Image Courtesy:
1. “Supply-demand-right-shift-demand” By SilverStar at English Wikipedia (CC BY 2.5) via Commons Wikimedia
2. “Economic-surpluses” By User:SilverStar – Own work (CC BY 2.5) via Commons Wikimedia