Final answer:
The equilibrium price is where the quantity demanded equals the quantity supplied in the market, often demonstrated where the supply and demand curves intersect. It reflects a balance in the market, resulting in no surplus or shortage of goods.
Step-by-step explanation:
The equilibrium price of a good or service is determined through the interaction of supply and demand in the marketplace. It exists when the quantity demanded is equal to the quantity supplied. This is not determined by trial and error, businesses simply totalling their costs and markups, or computing average selling prices, but by the natural equilibrium that occurs when the supply of goods matches the consumer demand at a certain price level. For instance, if we observe the coffee market, an equilibrium price might be $4 per pound of coffee, at which consumers are willing to purchase 200 million pounds, which is the exact amount producers are ready to supply.
The concept is key to understanding how markets function and finding the price that clears the market. At this price, there is no surplus or shortage of goods. However, various factors such as changes in tastes, population, income, and technology among others can shift the demand and supply curves, thereby changing the equilibrium price and quantity.