Equilibrium price is a common economics term that refers to the exact price at which market supply equals market demand. Selling goods and services at the equilibrium price point leads to optimized profit for a business. Despite this awareness, is very difficult for a small business owner to track market supply and demand in real time and update prices perpetually. However, recognition of the equilibrium concept helps in developing marketing and pricing strategies.
It is important for a manufacturer or product reseller to understand how current market prices relate to supply and demand. A price below equilibrium means you charge less than you could for a good based on current market demand. In fact, if you keep the price constant, you will likely run out because market demand exceeds available supply at a price below equilibrium. Running out of stock means missed sales opportunities and potentially upset customers.
On the opposite end of the spectrum, a price above equilibrium means your price exceeds the current supply and demand balance, which could lead to excess inventory after customer demand is satisfied. This is a better situation than running out, but it costs money to manage extra inventory. Plus, you may end up throwing out expired or rotten goods. With a price at equilibrium, you attract more customers.
Your ability and willingness to stick to an equilibrium price point often is influenced by the level of competition in your industry. In a highly competitive market, low-cost providers often offer goods below equilibrium price in hopes of achieving high volume. Others set higher price points but try to increase demand with additional services and benefits. Mid-range providers are often closer to equilibrium to attract the broad middle-income customer base. With less competition, the supply and demand ratio becomes more business-focused versus industry-focused. The equilibrium price tends to be higher with less competition because the overall market has less supply.
Equilibrium prices is constantly in flux, as supply and demand variables fluctuate over time. Various changes affect the levels of supply and demand. Weather may help or hinder seasonal supplies of produce, for instance. Societal changes, news coverage and emergency trends can help or hinder demand for a good. To keep up with equilibrium prices, you would have to adjust prices constantly, as consumer gas companies do. However, you must consider your overall pricing and marketing structure. A high-end provider typically wants to avoid regular cost-cutting. As a low-end provider, you have to monitor dramatic upticks in prices, so you must weigh optimum price with broader strategic objectives.
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