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Equilibrium price factors

It is said that for every action there is an equal and opposite reaction. These forces typically balance out each other resulting in a state of equilibrium and peace. The same concept holds good in the stock market and in the forex. There is always an equilibrium price which balances out in the end.

Factors

There are two main important factors involved in equilibrium price:

• Supply
• Demand

The equilibrium price works on the principle of these factors balancing out each other. When one rises the other counteracts and gets reduced and vice versa.

Method

The method in which this phenomenon works is quite simple. For example, we have a given product X. the demand of the product is very high, but the supply of X is low, in this case the price of X begins to rise. When the price of X begins to rise, automatically the supply is increased thus helping to bring down the price of X.

Thus, the equilibrium price helps in maintaining the market in a steady state of harmony without allowing any one particular factor to get affected.

Importance

The equilibrium price is what market regulators are always constantly trying to achieve. The bull and bear runs which many times are heard in the market are due to a result in the imbalance of the equilibrium price. For example, when there is excessive supply, which is not counteracted by an increase in the demand, there is a fall in the price, this fall in the price triggers the bear run in the stock markets.

Similarly, when the price of a good or service increases without a corresponding increase in supply, the price automatically rises triggering a bull run. So, equilibrium price is a very important aspect for the harmony of the options market.