Final answer:
The equilibrium price is the price at which the quantity demanded equals the quantity supplied, allowing buyers to purchase and sellers to sell the quantity they desire. Price floors or ceilings set above or below this level create either a surplus or a shortage, disrupting the market and reducing social surplus.
Step-by-step explanation:
In economics, the equilibrium price is a key concept that indicates the price at which the quantity of goods demanded by consumers is equal to the quantity of goods that producers are willing to supply. When the market is at this price, it is said to be in balance, and buyers are able to buy all they want while sellers are able to sell all they want. Specifically, at the equilibrium price, both the quantity demanded (Qd) and quantity supplied (Qs) meet, ensuring that the market clears with no excess supply or demand.
Under conditions where the equilibrium price is maintained, price floors or price ceilings that are set above or below this price can disrupt the market balance. A price floor above equilibrium creates a surplus where Qd is less than Qs, leading to unsold excess. Conversely, a price ceiling below equilibrium leads to a shortage where Qd exceeds Qs, resulting in demand that cannot be met. Both of these conditions reduce the number of transactions and decrease social surplus, highlighting the importance of equilibrium pricing in efficient market function. As a simplified example, if the equilibrium price of coffee is set at $4, and the market adheres to this, consumers will buy exactly 200 million pounds, aligning with the amount sellers are keen to supply.