what is equilibrium 
equilibrium is the state in which market supply and demand balance each other and as a result prices become stable generally an over supply of goods or services causes prices to go down which results in higher demand while an under supply or shortage causes prices to go up resulting in less demand the balancing effect of supply and demand results in a state of equilibrium investopedia paige mclaughlinunderstanding equilibriumthe equilibrium price is where the supply of goods matches demand when a major index experiences a period of consolidation or sideways momentum it can be said that the forces of supply and demand are relatively equal and the market is in a state of equilibrium economists find that prices tend to fluctuate around the equilibrium levels if the price rises too high market forces will incentivize sellers to come in and produce more if the price is too low additional buyers will bid up the price these activities keep the equilibrium level in relative balance over time special considerationseconomists like adam smith believed that a free market would tend toward equilibrium for example a dearth of any one good would create a higher price generally which would reduce demand leading to an increase in supply provided the right incentive the same would occur in reverse order provided there was excess in any one market modern economists point out that cartels or monopolistic companies can artificially hold prices higher and keep them there in order to reap higher profits the diamond industry is a classic example of a market where demand is high but supply is made artificially scarce by companies selling fewer diamonds in order to keep prices high as noted by paul samuelson in his 1983 work foundations of economic analysis the term equilibrium with respect to a market is not necessarily a good thing from a normative perspective and making that value judgment could be a misstep 1markets can be in equilibrium but it may not mean that all is well for example the food markets in ireland were at equilibrium during the great potato famine in the mid 1800s higher profits from selling to the british made it so the irish and british market was at an equilibrium price that was higher than what consumers could pay and consequently many people starved equilibrium vs disequilibrium