This is probably an extremely basic question, however I'm still unclear about the answer. In a typical supply and demand curve graph, such as

A simple typical supply demand curve

the equilibrium price is said to be

the only price where the plans of consumers and the plans of producers agree—that is, where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied)


if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity.

But why should this be so? In the above figure, at the \$1.80 price the demand is 500, netting the supplier a 500*\$1.8=\$900 revenue. Which is higher than the $1.4*600=\$840 revenue it would get at the equilibrium price. And even though at the \$1.80 price the supply exceeds demand, the supplier could just choose not to produce more than the 500 demanded at that price. Or if it does produce it, it could store it somewhere for the future, for example. As a rational agent, the supplier wants to maximize its revenue, so dropping their price to the equilibrium price would be counterproductive to that goal.


1 Answer 1


What you write is true in a monopoly situation, but not when there are multiple firms on the supply side.

However, when equilibrium is discussed in this context people usually mean competitive equilibrium, that is equilibrium in a market where many firms compete. So at price \$1.80 several suppliers want to sell an aggregate amount of about 680 gallons. However demand is only 500 gallons. This would prompt the suppliers who are worried about not being able to unload all their stock to offer it at a slightly lower price, say \$1.79, undercutting their rivals' price. The idea is that by lowering the price somewhat you can greatly increase your market share, and unload your stock, to the general dissatisfaction of your rivals, who are now stuck with their own surplus gasoline.

Thus \$1.80 is not an equilibrium price, as suppliers have incentives to unilaterally push their own prices down.

  • $\begingroup$ What about the reverse scenario then? Is not there an incetive to make prices as low as possible, sure you won't be able to supply everyone but you would beat all your competition... $\endgroup$ Nov 1, 2022 at 13:20
  • $\begingroup$ Really not sure what you mean by a "reverse scenario". Please post new questions as new questions and elaborate if you wish. $\endgroup$
    – Giskard
    Nov 1, 2022 at 13:53

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