Answer: Equilibrium price is determined by the interaction of demand and supply.

• When the price is too high: Supply becomes greater than demand. A surplus occurs, so sellers may lower the price.
• When the price is too low: Demand becomes greater than supply. A shortage occurs, so the price may rise.
• At equilibrium: Demand equals supply, and the market reaches a balance.

The equilibrium price is found where the demand curve and supply curve intersect.

Example: If coffee is too expensive, some cups may remain unsold. The shop may reduce the price. If coffee is too cheap and many customers want it, the shop may raise the price. The price tends towards the level where demand and supply match.

Remember: Demand and supply together determine the equilibrium price.