Equilibrium : Where the price comes from

Early 2005, the second year of my American life, I had visited my apartment rental office because I was upset about the fact that my rent will be increasing a lot after renewal. I could meet the manager at the office and then asked, “What is the reason anyway my rent will be so high like this?” Then she plainly answered, “Supply and Demand.” I was speechless after hearing that answer and so far I remember it was the most embarrasing moment in my life.

I had been studing and living with Economics about 6 years, even more if I added the period of my millitary service. Even though the long years of study I had, I even didn’t know the characteristics of the price in my heart. Now, I have been teaching almost 10 years at the college, my students know really well about this answer. They usally get a right answer even the first class of the principle of Economics.

The “market”, where the trade happens, supply and demand meet, the price is determined, is the answer. In other perspectives, the state, consequence, or result from economic activity in the market, can be called “equilibrium.” One of my professor in my undergraduate year, emphasized that he think that the equilibrium is the most important concept of summarizing Economics. I strongly agree with his argument. Economists, who especially study microeconomics, have the good paradigm of supply and demand model and the equilibrium is the status quo of all their model.

The origin of the equilibrium is market. If we accept broad meaning of market, not only physical and old style farmers markets but also new format of market, such as eBay, Amazon, other online stores and so on, we can easily understand the fact that the price of each product will be determined by the interaction between buyers and sellers. In Economics theory, the most simple and clear model so far, boldly speaking, is the supply and demand model. It is even easy to understand and intuitive.

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