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equilibrium price

Contributor(s): Ivy Wigmore

An equilibrium price, also known as a market-clearing price, is the consumer cost assigned to some product or service such that supply and demand are equal, or close to equal. The manufacturer or vendor can sell all the units they want to move and the customer can access all the units they want to buy.

Dynamic pricing seeks to find equilibrium prices in response to marketplace changes, adjusting prices on the fly in response to supply and demand fluctuations. Other models, such as value-based pricing, seek to capitalize on intangible qualities or employ various tactics to manipulate demand and achieve a higher profit margin than calculated what can be realized through cost-based pricing.

Equilibrium prices tend to remain stable but events that affect supply and demand inevitably affect prices as well. Cost increases for raw materials, for example, may mean that a manufacturer cannot produce the same product without increasing prices or cutting into the profit margin. The result may be that the manufacturer produces fewer units and charges a higher price. Fewer consumers may purchase at the higher price but, because fewer units are available, an equilibrium price may be reached.

This was last updated in August 2018

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